Strategies for Purchasing Under a Supplier’s Minimum Order Quantity

by Odmya
0 comment 10 minutes read

Minimum order quantities (MOQs) are inventory and production requirements set by factories and manufacturers. MOQs exist because producing goods below a certain volume is often not cost effective for factories. However, customers sometimes need less than the MOQ, which can pose challenges for procurement and sourcing. This article will discuss strategies that both customers and suppliers can use to address mismatches between customer needs and factory MOQs.

MOQs are typically based on the batch sizes that factories and manufacturers use to optimize their production processes. Producing smaller batches disrupts workflow and equipment changeovers. It can also lead to higher per unit costs if the fixed costs of production are spread over fewer items. Many factories establish MOQs to ensure they are operating efficiently.

For customers, not being able to meet the MOQ can mean you have to purchase more inventory than you need. It may also make it harder to source small batch custom orders or manage fluctuating demand. However, there are creative solutions that both buyers and suppliers can explore to overcome MOQ barriers.

Strategies for Purchasing Under a Supplier's Minimum Order Quantity

Strategies to Meet Customer Needs Under MOQ:

If your business needs less than the minimum order quantity set by a factory, consider these potential strategies:

Bundle Orders with Other Customers

Partnering with other customers to bundle orders is one way to collectively meet the MOQ. This allows you to split larger orders across multiple buyers to reach the required volume. It works best when you share common supply needs.

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Negotiate with Factory to Reduce or Waive MOQ

Factories will sometimes negotiate flexibility on small orders for good customers. Explain your situation and request an exception or reduced MOQ. Offer to pay a little more per unit or give the factory extended forecasts.

Order Inventory and Handle Fulfillment Yourself

Order the MOQ and handle warehousing and order fulfillment internally. This adds costs but gives you control and flexibility. Use this strategy if you expect sales to eventually pick up.

Switch to a Factory with Lower MOQs

It may be possible to find alternate suppliers with lower minimums. But you lose the benefits of your current factory relationship. Do a thorough cost/benefit analysis before switching.

Use 3PL Providers as an Intermediary

A third-party logistics provider can combine orders from multiple customers to meet MOQs. This simplifies procurement but 3PL fees may eat into cost savings.

Focus on Made-to-Order Custom Manufacturing

Work with factories oriented toward custom orders and made-to-order manufacturing. Lead times will be longer but no excess inventory.

The Pros and Cons of Each Strategy:

Each approach for dealing with MOQ issues has unique advantages and disadvantages. Companies should weigh the pros and cons against their specific business context and constraints.

Bundling Orders:

Pros:

  • Achieves volume discounts
  • Share costs and risks with other customers
  • Split MOQ across multiple buyers

Cons:

  • Logistically more complex
  • Needs other buyers with aligned demand
  • Lead times may increase

Negotiating with the Factory:

Pros:

  • Maintain supplier relationship
  • No inventory risks or costs
  • Simple and aligned process

Cons:

  • No guarantee factory will oblige
  • May pay higher per unit costs
  • Can damage negotiation leverage

Ordering Inventory Yourself:

Pros:

  • Gain flexibility and control
  • Avoid MOQ issues entirely
  • Excess stock for future demand
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Cons:

  • Carrying and storage costs
  • Obsolescence and expiration risks
  • Tied up working capital

Switching Factories:

Pros:

  • Resolve MOQ issues
  • Gain alternate supply source

Cons:

  • Lose benefits of current factory
  • Switching costs and risks
  • Test samples and qualify quality

Using a 3PL:

Pros:

  • Outsource bundling logistics
  • Pool orders to meet MOQs

Cons:

  • Additional 3PL fees
  • Lead time delays
  • Lose factory relationship

Made-to-Order Manufacturing:

Pros:

  • Customized low volume orders
  • No excess inventory
  • Aligns with demand

Cons:

  • Higher per unit costs
  • Slower fulfillment timelines
  • Production scheduling challenges
Strategies for Purchasing Under a Supplier's Minimum Order Quantity

Creative Solutions for Specific Scenarios:

While every situation is unique, there are some common scenarios where creative problem-solving can help reconcile the gap between customer needs and factory MOQs:

Small Startup Needing Low Batch Production

A startup launching a new product needs small test batches before committing to mass production. In this case, negotiating reduced MOQs or made-to-order manufacturing is ideal. Offering to prepay or floating incremental costs can incentivize factories to be flexible.

Businesses with Fluctuating or Seasonal Demand

Companies with spikes in demand at certain peak periods may struggle with MOQ commitments during slower seasons. Ordering extra inventory to spread over forecasted lower-volume months can help smooth out requirements.

Companies with High Mix, Low Volume Orders

Businesses with a high variability in product configurations struggle to forecast batch sizes needed. Pooling demand across a platform of modular or customizable options can help aggregate orders and simplify logistics.

Businesses Needing Samples or Pilot Test Batches

When developing new products, companies need small test batches. Factories will sometimes produce limited runs of samples at a slightly higher cost to win future large-scale production contracts.

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Key Takeaways and Considerations:

Minimum order quantity requirements are a reality of working with overseas factories. But through collaboration and creative problem-solving, buyers and suppliers can find ways to overcome MOQ barriers. Key tips include:

  • Explore bundled orders, inventory buffers, lower-MOQ factories, 3PLs, and custom manufacturing
  • Weigh the pros and cons of each approach against your specific business context
  • Offer win-win incentives to factories for small order flexibility
  • Pool demand across products and customers when possible
  • Build relationships and forecast accurately to support negotiation leverage
  • There are often solutions to creatively meet business needs within factory constraints

With some flexibility and creativity on both sides of the buyer-supplier relationship, businesses can often find ways to reconcile customer order needs with factory MOQs and production requirements.

FAQs

Q: What is an MOQ?

A: MOQ stands for minimum order quantity – the smallest order a factory will accept.

Q: Why do factories have MOQs?

A: MOQs help factories optimize production batch sizes and cover fixed costs. Small orders disrupt efficiency.

Q: What if my business can’t meet the MOQ?

A: Explore bundling orders, negotiating exceptions, using 3PLs, or made-to-order manufacturing.

Q: How can I get a factory to waive the MOQ?

A: Offer incentives like higher per unit pricing, long-term forecasts, or guaranteed future orders.

Q: What are the risks of ordering excess inventory myself?

A: Carrying costs, obsolescence if demand drops, tied up capital. Weigh pros and cons.

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