In order to boost profit margins, you need to balance how much product you buy from your supplier with how much you sell to your consumer. It sounds simple, but there are a lot of variables that can affect this delicate process. So how can you make sure that you are buying the right amount of product, from the right supplier, for the lowest cost without the risk of over-exposure?
As we discussed in 12 Ways To Rev Up Profit Margins, one way to boost your margins is to take into account your supplier’s MOQ. An MOQ, or Minimum Order Quantity, is the smallest quantity of a particular item or SKU you can order from a supplier at one time.
What’s the purpose of an MOQ? And how can you “mind your MOQs” when searching for the most direct source and grow your profits?
WHAT IS AN MOQ?
For marketplace sellers and retailers a supplier traditionally may either be a manufacturer or wholesale distributor.
There is a difference between the manufacturer’s minimum order quantity and that of a wholesale distributor. A manufacturer minimum order quantity is calculated as the lowest quantity necessary to sustain the costs associated with engineering, design, setup, and production costs plus a minimum markup. This cost could vary depending on the lifecycle stage of a product but could include; the cost of creating a new mould or tool for production, tool testing, first sample quality control inspection, mould refining, raw material procurement, production line staging, initial production run, quality control, packaging, and packing and shipping logistics. A wholesale distributor minimum order quantity is calculated to support the operational overhead incurred for procuring, importing, receiving, picking, packing, and shipping finished goods. These goods are usually received as bulk quantity for repack or in premeasured case lots on pallets.
The MOQ is normally derived to insulate the supplier at the lowest level of demand but the benefit to sellers is only realized with emerging products that can be forecasted for continued growth. By purchasing in greater quantities than MOQ, a marketplace seller can reduce their cost of acquisition by purchasing quantities that exceed the supplier’s required minimums —the more you buy, the less you pay. With the overhead for a supply run covered, the supplier is more flexible to sustain unit price reduction because each unit above the MOQ will absorb and dilute the supply run overhead per unit.
You want to avoid selfish suppliers who will set an MOQ for their profit alone. The transaction should be mutually beneficial to you and your supplier. A good supplier knows that in order for them to make money, you have to be profitable—the only way to grow is to work together.
A general rule of thumb is that larger, pricier products will likely have a reduced minimum order quantity than smaller, inexpensive units. Also, it is common that the more you order, the greater your discount.
But sometimes the discount you get from ordering more product leaves you stuck with inventories you can’t sell through. This is why you need to balance how much you buy with how much you sell. If you don’t have that data because you are new to the industry, starting a new product, or don’t have the tools, you want a lean and reliable supplier who can provide that information for you.
WHAT CAN YOU DO TO “MIND YOUR MOQS”?
1. KNOW YOUR PRODUCER.
There are three major things that affect a minimum order quantity:
- Producers Core Competencies: do they specialize in your industry? do they already have the tools to make your product? do they have set or negotiable prices? what features do they provide?
- Production Supply Chain: do they deal with a heavy supply chain that will raise costs? do they have consistent or varying minimum order quantities for different units?
- Seller Relationships: does your supplier have a good relationship with their Producers? are they willing to partner with you and work towards mutual benefit?
You want a producer that ideally already specializes in your industry, so they have perfected the art of making your product. They will also have the equipment, pricing, relationships, and data available to you to make your life easier.
In order to reduce costs, you want a producer with:
- Quality control
- Significant core competencies
- Efficient workflows
- Strong relationships
- A responsible view of an orderly marketplace
2. KNOW YOUR INDUSTRY.
Before you can properly vet your supplier, you need to be knowledgeable about your industry. Find out where similar companies source their materials and learn about traditional supply chains and pricing structures within your trade. If you go in equipped with knowledge, you are more likely to negotiate and understand the appropriate MOQs to give you the right inventory and the largest profit margin.
Check out this article by Mashable to learn how to Become An Expert In Your Industry.
3. NEGOTIATE OR SEEK LOWER-PRICE SUPPLIERS.
As we mentioned in our previous article, it doesn’t hurt to negotiate with your current suppliers for a lower minimum order quantity or a lower price per unit. Large suppliers or factories often won’t budge on this due to heavy supply chain models or simply because your small business isn’t important to them. They are often focused on cutting costs to meet the demands of all of the different cooks in the kitchen.
You may want to consider working with a smaller supplier. Smaller companies tend to focus on high-quality products and are able to partner with you to meet your individual production needs. You may also want to look into direct wholesalers to minimize the traditional supply chain and cut out the middlemen taking your hard-earned profit.
Learn more about how a private label like Home Revolution can boost your profits.
4. STREAMLINE COMPONENTS AND PROCESSES.
If you are producing unique products, see if you can combine resources of different SKUS to save money on raw materials and to meet the minimum quantity of an order. You can also determine if you can use the same machinery and labor to make different products, which could drive down the price per unit or per order by saving on production costs.
5. PURCHASE GOODS FROM A WHOLESALE PRODUCER.
If you are not producing a unique product, you should purchase goods from a private label lean wholesaler producer like HomeRev. These companies invest in their own tooling and produce specific products that are high quality, low cost, and high sell-through based on intense research and development. Find a wholesaler that operates in your specific niche, like the home and lifestyle industry, so they have significant data to help you minimize your costs.
You want a company that is centered on you as a seller—a company that understands that their success directly correlates with your success. HomeRev’s mission statement is: “We work to ensure that you maintain control in the profitable expansion of your business.” This means getting you the right inventory, at the right quantity, with the best quality, for the lowest price—all to boost your margins and keep the buying and selling cycle profitable for everyone!
If you know the basics of what goes into a minimum order quantity and how you can work with the right supplier to mind your MOQs, you’ll quickly start minimizing costs, selling through your inventories, and increasing your profit margins!