Especially if you are quite new to creating products and ordering them from small-run manufacturers, you might be left asking, “Why is this manufacturer giving me a hard time with high quotations, I just want very few samples of the products so I can be sure of the quality?” We started going directly to manufacturers in China back in 1998, and have learned the ropes about small-run manufacturing processes, minimum order quantities, and how it relates to an entrepreneur’s overall product launch plan. There is a delicate balance in determining MOQ’s, which is essentially the specific lowest number of products one can order from a supplier. MOQ’s are not random calculations, and are mostly precise as they are based on hard facts and figures. Learn the basics of MOQ’s and small-run manufacturing processes as it has applied to our business model, so you can get informed perspectives and information on how you can best navigate the complex product-specific structure in your own terms.
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I wanted to talk about a subject that is probably of interest to everybody who’s a member here, but in particular, anyone who is purchasing products to sell either on their own website or at Amazon. That is what I want to talk about minimum order quantities and small run manufacturing options and considerations. I’ve done this a lot. I’ve done this for myself as a business owner. First manufacturing product in the USA, starting in the mid to late ‘90s and then also importing from China. I started going over to China in 1998 to find manufacturers and work out the details of manufacturing with them. I’ve dealt with small run both here domestically and small run in China and large run manufacturing issues.
For now, we’re talking about small run and minimum order quantity, also commonly referred to as MOQ. If you’re dealing with any manufacturer, MOQ as an acronym, Minimum Order Quantity is usually something that’s quoted on every quotation you may get for a product. Regardless of where you’re manufacturing, it’s a common term. There are a couple of the terms I’m going to define that go hand–in-hand with minimum order quantity and it’s a difficult thing. Minimum order quantity is something you want to be very upfront about with the manufacturer or distributor, whoever it is you’re dealing with that you’re going to be purchasing product from. A lot of us want to quote higher numbers because we believe our product is going to sell well. We want to make sure we get a good price and so we might give some higher numbers and quote what I would call a little bit more of a rosy scenario.
If it sells well, I’m going to need this supply and I want to make sure that manufacturer can supply that. There’s nothing wrong with that. You definitely want to make sure you have a manufacturer that can meet your capacity requirements. You also want to make sure that you don’t over promise and under deliver when it comes to placing a purchase order. If all you talk about with a potential manufacturer is quantities of between 5,000 and 10,000, and then when you come back to place your first order, you want to place an order for 500, it’s a very different conversation. The manufacturer is going to want to probably charge you a higher price for 500. There’s nothing wrong with that. You want to be prepared for all situations, but you want to usually either tell a manufacturer you want your minimum order quantity to be 500 or 150, if that’s what it is. It doesn’t matter.
If it’s a standard product that a manufacturer makes in general anyway, then smaller quantities are going to be probably easier to achieve than with a manufacturer that is producing something that is custom to you. Whether that’s a custom color, it’s a custom size of a product or any variation that’s unique to you, which we would encourage all of you to do, so you’re not competing on price with somebody else who trolls your listing and sees when you’re listing on Amazon is doing well. They want a piece of that, too, and then go to the manufacturer and buy it just like you can. Having something that’s unique to you, something that’s not easy for them to get, at least that there are higher barriers to entry is encouraged for obvious reasons.
It also comes with the consequence of there’s probably a minimum order quantity. This might be helpful is to understand why manufacturers would require a minimum order quantity. I run into this a lot and in different ways, it’s different kinds of manufacturers and with different kinds of production lines, different kinds of machines that are being run. Let’s say you’re even producing a product already or the manufacturers producing a product. I’m going to use one of my products as an example where this is what I was manufacturing in the late ‘90s and 2000s are pens. These are stylus pens. It’s a plastic-molded stylus tip and then the ink extends beyond it. These were popular in the days of the PalmPilot, late ‘90s, early 2000s and black, as you can imagine. Pretty easy to get and even white. Pretty easy to get. Let’s say you want to make one in this green color. Even though these molds exist and the manufacturers were making them all the time for us, when it came to getting custom colors, at that time, Amazon wasn’t even selling products. They’re only selling books. We had to sell these on our own website and had our own hardcoded shopping carts and the whole thing.
When we had a manufacturer, who bought some of the retail products and then they want their drug logo printed on it and they want to buy a quantity of them in a particular color, they would be wanting large quantities, too. It’d be 10,000 or even 50,000 pens, but the problem is they want to approve the actual color, not just have a picture of it. They wanted to have a physical pen in their hands to approve it. We talked to my manufacturing. At that time, as we’re doing this, we’re making these in China and shipping them over to the US. We printed on them here in the US, but we needed to get the actual colors. We’re going to mold this in this green color. We send them a pantone color and then they’re going to come back to us with, “Yes, we can make it a new pantone color but the minimum order quantity for that color that you would buy is 1,000 or 2,000.” Honestly, I don’t remember what the minimum order quantity was.
They had to go and have the colorant for the plastic custom made and matched to make this green color and then they mix it with the natural plastic and this is ABS plastic. It’s one of the most common plastic materials that’s out there, but the way you color it is you have a natural plastic, which is translucent colored plastic and you mix colorant with it in the molding process. When you mix colorant, they have to buy a 50-pound bag of colorant in order to make me a dozen pens in this color. A 50-pound bag of colorant is going to last you probably hundreds of thousands of pens because these pens will only take a very small amount of plastic. They would say, “Minimum order quantity you need to buy of this custom color pen is 150 pens or 500 pens,” whatever it is. They would establish a price that was going to more than cover the cost that they have to spend to get this 50-pound bag of colorant. There may have been a smaller quantity of colorant at five or ten-pound bag of colorant. It’s been a while since I’ve done that. They had to buy a minimum amount of colorant in order to make it. You can’t make it and make enough to mold ten pens.
They would cover their cost and set their minimum order quantity. Sometimes the manufacturer would say, “We’ll make this custom color for you. We have to buy this amount of colorant and we’re going to charge you for the colorant. It’ll be here, it’ll be yours, it won’t be anybody else’s. Whenever you make this color pen, we’ll use your colorant and then we’re not going to add that cost to the cost of your pens.” Think of it like a tooling charge or a set up charge. These types of things come into play in determining what the minimum order quantity of a product that the manufacturer is willing to sell it to you. It’s an amount that they’re going to determine. You can ask for whatever minimum order quantity you want and I do recommend that. If you want to get a product quote and say, “You want a quote for buying 100, 500, 1,000 and 10,000,” you can run the gamut, so you can see and know what it’s going to cost you in the beginning and what your savings will be down the road when you can order a whole lot more of a product. That minimum order quantity, there are many different things that can go into it. The colorant example is one.
Another is usually the fact that when they make an actual product on production machinery and they need to give you a sample, one or two or ten, it doesn’t matter. It’s all very small quantity, usually that machine they have to make that on, is otherwise running 24/7 or at least running two shifts a day, sixteen hours a day and is down the other eight hours because the plant doesn’t run a third shift. In order to make your sample, they have to not be using that machine to produce production products for other companies. Some factories are not going to be completely 100% capacity and you hope they’re not because you want them to make your product and give your business some priority in their schedule. Oftentimes, the best machines that they have are being used for production. In order to take that machine offline for production, load your custom color material in it or your jigs, or tools or there are different factors that go into what they need to do to make your sample and make it with production quality to show you so you can have confidence what they’re going to make in production is what you want to buy. You got to produce on those machines and to do that, they got to break into production, they’re not producing for somebody else. There’s a cost associated with that.
Sometimes, a factory will call that a setup cost that just the labor and time involved in taking your mold, putting it into the machine, whether it’s a mold or an extrusion die or wood cutting knives, it could be a host of different things. Put your printing plates in the machine, put your ink formulas into a machine. There are all different considerations. If you’re doing fabric, weaving something, it’s putting the right fibers on shuttles to run on the loom. There’s always some setup process that goes on and there’s a cost associated with it. They will either charge you a setup charge or they will tell you, “We’ll do it for you but there’s a minimum order quantity you’re going to have to buy of this product, of this sample.” If you’re going to do a small run, you got to do a minimum of 500 because for them to break into production, set up the machine, run your colors in it, and then take your mold and your colors out of the machine after the fact, there’s a certain amount of labor and costs that’s real, that’s associated with that.[Tweet “There’s always some setup process that goes on and there’s a cost associated with it.”]
In order to make it worth the company’s while to bother doing it, they need to sell a certain number of pieces. It usually equates to they need to get a certain amount of dollars out of the effort if they’re going to bother doing it. There are many things that creep in the minimum order quantity. I don’t want you to think that minimum order quantity is a random calculation. It’s usually not. It’s usually quite precise and based on some hard facts and realities of the manufacturing process, the materials, the timeline that it’s going to take or sometimes in the case I gave before about the colorant of plastics, most factories that mold products out of plastic, they don’t manufacture plastics nor colorants. They all work with sub-suppliers where they buy their raw plastic material from to be molded and they buy the colorant. They usually mix the colorant on their facility, molding the parts, that’s something they do. There’s a ratio of colorant to natural plastic that they use to mix and end up with the right color product at the end of the day. They’re usually not buying premixed colorant with plastic because you end up storing in the factory a whole lot of different colors of large volumes of raw material. Instead, you can have one batch of raw material used across a lot of different products and then the smaller amounts of colorants for each recolor that you run. They’re going to mix the color in house but you have outside sub-suppliers, outside distributors that have their own rules in business.
I remember early in my career I was thinking, “Why is this manufacturer being so difficult? All we need is a sample or we just need a small run.” They always want us to run a bigger run. It’s not because they want you to run a bigger run. It’s usually that they have requirements and limitations that they deal with and it’s financial reality. They may not be a huge customer to the sub-supplier and sub=suppliers aren’t going to give them a deal on colorant just because of the potential of your project. They’re separated from your project. They don’t know anything about it, even if it’s likely to go. Minimum order quantity, it’s reality. Make sure you’re upfront about it, know what it is and go ahead and I would say make a recommendation, have an idea of what minimum order you want to place and ask them for it. They’ll tell you that they can and here’s the price or they can’t and you need to buy this much. If you go and tell them, “Let me know what your minimum order quantity is,” you’re inviting them to push that up to the higher side that makes it more worth their while. If you already have an idea of what you want or even a suspicion, get a little minimum order quantity.
In this day and age of Amazon selling, a lot more manufacturers, especially in Asia, have gotten accustomed to Amazon sellers buying products and starting small and then hopefully ramping up and buying more. It probably won’t be a foreign concept to them for you to ask for 100, 150, 200 minimum order quantity. The more you buy, the cheaper it’s going to be and the more attention you’re going to get from the manufacturer in terms of priority in their schedule and things like that. A couple other things that go hand–in-hand with minimum order quantity. I only want to mention this because usually you’re getting the minimum order quantity number in some quotation. You’ll hear more of some of these terms from other people, especially more involved in the shipping and logistics side of the business. You’ll get a quote with your minimum order quantity and then a quote for larger quantities and then you’ll have another term on there that’s either EXW or FOB. Those terms are pretty important. You want to pay attention to that.
EXW is Ex Works factory. What they’re saying is that’s the price of the product but it’s going to be boxed and ready available at the factory. A shipping or logistics company will need to pick it up from the factory. They are not going to deliver it anywhere for you and that’s okay in many instances. The other option that you usually get quoted is FOB, which is Freight On Board. What that means is they will quote it FOB the port that it’s going to leave, especially if you’re making something in Asia. This is very important for that. It was going to say FOB Yantian or FOB Shanghai or FOB any other port city in China where it would be going out. If you’re going to get a quote from your logistics company, they’re going to ask you what port is it shipping out of. Freight On Board means the price they’re giving you for that product is inclusive of transportation inland from wherever their factory is to the port of export. They will get it right to the logistics company and that that cost is included in your price. That’s important.
If you are shipping a large quantity and it’s going to go via ocean, you’re going to go in a container. Either you’re shipping a full container or even if it’s less than container load for whatever reason, the product you’re ordering, there’s enough of it you’re ordering and it’s of a large volume enough in terms of cube that it’s going to take and you can wait a few weeks for travel over water. That it’s more economical for you to go over water than it is to send it via air, which is your only other option from Asia. They’re going to include that transportation to the port. That’s one more detail you don’t have to worry about when you’re dealing with your logistics company. All the costs it’s going to take you to land that in the US or send it to whatever other country you’re sending it to. Ex Works is they’re making it inside the factory. They’re not paying to send it anywhere. That may be perfectly fine. I’m going to go back to my example of the pens again. These pens, we started manufacturing these in the US in low quantity and then in 1998, I went to China and I started manufacturing them at a company in the Shanghai area.
We started ordering pens in large quantities. We were ordering them in tens of thousands and in some cases, hundreds of thousands of pens in an order. We started doing large volume mostly for these drug companies that we’re giving these away to doctors because they had drug databases at that time on PalmPilots and so this was relevant to the work that they were doing, which you can’t do any more if anybody out there is in the pen business. The FDA is changed that you can’t give pens away to doctors anymore for some reason beyond me. These pens, even though we would order 50,000 and 100,000 at a time, these pens are so small. We still couldn’t fill a container. When we analyzed the cost difference between ocean freight, this is a number of years ago. A lot of things have changed but a lot of things also have not changed. Cost of transportation has only gone up every which way. I don’t think we ever shipped any of these pens ocean freight. We ship them all airfreight. Part of that is we were an East Coast company at the time. We were in Rhode Island and now I’m in California. Getting the pens to Rhode Island in every case because of the small size of the product on a per pen basis, the differences between airfreight and ocean freight was so insignificant, we air freighted everything.
In that case we use the quote Ex Works, EXW the factory. We worked with a freight forwarder, a logistics company that would arrange to pick up all of our boxes of pens right from the factory and take them to whatever appropriate airport was necessary to get them on air cargo and ship them to us in the United States. Not specifically an MOQ issue, but I wanted to explain those couple terms. You’ll probably hear more about that in other expert sessions in the not too distant future. I know we have some coming up with a representative of Worldcraft Logistics. This is their entire business and they know that a whole lot better than I do. Definitely, they’re the experts there. I just have some experience in it. Minimum order quantities, small run manufacturing options. There are a lot of small run manufacturing options. Depending on the product you’re making, what material it’s made of, how complex the product is. Where you can make a small run of product or haven’t made for you here in the United States and you don’t need to go to China and starting out in a small volume that makes a lot of sense.
I have a couple of clients that are making kitchen accessories made of silicone. There are plenty of processes here in the US for prototyping those things and real materials here. It involves 3D printing, rapid prototyping. You can make a real silicone part like you’d use on a kitchen utensil or something here in the US pretty economically and even make a run of them, of let’s say 500 or 1,000 so you can get a good market test. In that case, as long as the product doesn’t involve a whole lot of assembly of a lot of little parts, especially if it doesn’t have electronics in it, then I think there are lots of options for making a short run manufacturing of a product here in the US and prove out that you have a market for the product. That the customer is willing to pay what you want to charge for it and that you can dial in the keywords on an Amazon listing and start reaching the right audience. You can test all that out before you go and manufacture a whole lot. You could make 100 of something or even 50 if you want to start that small.
We have several examples of things we’ve been doing with clients where we’re doing that. Even if it goes beyond3D printing, in the case of a silicon mold, you can actually 3D print a silicone mold here in the US and have a local model shop or there are some manufacturers that deal with silicone here in the US. The big obstacle is usually tooling and it’s expensive to get a tool made to do that. The reality is we can 3D print a mold here in the US and then pour silicone into it and make a short run. Even though the cost per part will be a lot more than it will be in China, after you make a tool there and work with a manufacturer that does this day in and day out over there, the reality is cost per piece maybe a lot higher than is acceptable in the long run. Maybe on those first 100 that you sell and prove that there’s a market, prove as Tracy likes to say, “The dogs will eat the dog food.” Once you do that, that’s great. Then you can go make it and make a lot of profit if you invest in a tool, manufacturing and logistics of doing it overseas and bringing it into the US.
I would say it’s perfectly acceptable to make 100, sell them here in the US at the price that you intend to sell it for long-term, even if you make zero profit. To me it’s perfectly acceptable. Sell 100, even 500, maybe no more than 1,000 but 100 to 500 for sure. Don’t make any money. Make sure you cover your costs or consider it a marketing expense. You’re proving that a market exists, even if it costs you $1 per piece beyond what you can sell it for. What I mean by that is at the end of the day, you’re selling this small run of 100 on Amazon, and you’re going to charge $29 per item to sell it. The reality is each of those item costs you $30 to make it, deliver it and sell it through that whole system. You’re sending another $1 out the door with everyone than you’re ever going to make back. That is the cheapest market research expense you will ever have to prove that it either works or it doesn’t work. If it doesn’t work, you just saved yourselves many more thousands or tens of thousands of dollars doing a bigger run on something that’s never going to sell or you proved, “That sold really quick. I can definitely sell these.”
Maybe you have a little more confidence to go a little deeper in your order and get a better price and not just order 500 but order maybe 2,000, 3000 or 5,000. You want to be cautious going deep on inventory. My point is small run manufacturing, there are a lot of options available for you in the United States to go and do that. There may be options even doing some things in Asia for small runs. Manufacturing leading much more accustomed to the realities of short runs and getting started in a product. Those are my thoughts on minimum order quantity and short run manufacturing options. I’m definitely a big believer in starting small and getting it right. Getting it dialed in and then going deep. There’s always a time. There is a version of our pen that is metal. It’s a high quality one. It’s made in China. We made it in Rhode Island. Sometimes this was black, sometimes it was still the same plated brush finishes. The same with the end, they weren’t always plastic. It’s a lot more expensive to make in Rhode Island and the whole barrel is one piece. Everything gets put in from the very top, whereas the other one is split in the middle and come apart in two halves.[Tweet “The more you buy, the cheaper it’s going to be and the more attention you’re going to get from the manufacturer.”]
It was definitely a short run manufacturing product. We had the larger volume one, all are higher quality product. Different materials, different processes and sometimes you do that as you get into large volume production. Different finishes become available to you, different techniques of manufacturing and engineering become available. In short run, you have to consider realities of tooling and manufacturing. Usually you do things a little differently. That’s another thing I guess I’d like to say about that. At any point and you do have any questions, please feel free to write in and I’ll be happy to revisit any of those questions or issues you may have regarding minimum order quantity and short manufacturing run options at a future Office Hour. Thank you so much and I’ll be back for another Office Hours. Thanks very much. This has been Tom on Product Launch Hazzards.
About Tom Hazzard
An inventor with 37 patents and an unprecedented 86% success rate for consumer product designs, Tom Hazzard has been rethinking brand innovation to design in success for over 25 years. Tom’s patented innovations provide entrepreneurs and businesses of all sizes a system to spread their brand, grow valuable consumers, and diversify into higher converting revenue streams without a lot of time, cost or effort. Tom is co-host of the Forbes-featured fast growth WTFFF?! 3D Printing podcast as well as host of two new podcasts, Feed Your Brand & Product Launch Hazzards borne out of his core business, Hazz Design, where he has designed and developed over 250 products that generate $2 Billion in revenue for retail and e-commerce clients.