BamBody is an Australian manufacturer of women’s underwear available exclusively on Amazon. Their Chinese manufacturing partner was unable to meet their demand, had quality issues, and could not efficiently deliver product to their on-demand warehouse in Texas. Read how Novalink helped BamBody meet production and shipping demands their Chinese partner couldn’t.
A minimum order quantity, or MOQ, is a manufacturing term. It refers to the lowest number of units that must be purchased at one time and can either be set based on cost or volume. Manufacturers or suppliers often use this technical term to describe a production run. By determining the minimum amount of product, they are willing to supply or manufacture in a single order, sellers can optimize their operations.
Often people starting out in manufacturing don’t understand that MOQ’s are not the most important thing to ask a potential manufacturing partner, and a consistent volume that engages full-time manufacturing teams year-round is more essential. In this post we will break down the concept of a MOQ, why it is often the thing people ask about (but they shouldn’t) and how to make the determination of their production output to ensure you and the manufacturing partner are a good fit.
Why Is Minimum Order Quantity Important?
MOQs are usually used by suppliers for one reason: generating profit from the sale of a service or product. After accounting for overhead and other recurring costs, it can take a large volume to break even when a supplier sells products with a minimal markup or narrow margins.
HKTDC.com provides the following examples of MOQ:
“MOQ for manufacturers: If a manufacturer sets his MOQ as 1,000 units, that means buyers must place an order of at least 1,000 units of inventory at a time.
MOQ for wholesale or retail partnerships: if a brand has an MOQ requirement, then the wholesale or retail partner will have to place an order of at least 50 units or $500 worth of product to be purchased together.
In some cases, suppliers are flexible and can change the MOQ. In cases of long-term partnerships between suppliers and retailers, it is likely to have negotiations on altering MOQ.
There are no fixed rules for MOQs or a fixed MOQ for all – every supplier and business type may have different setups.”
Why Do Suppliers & Some Manufacturers Use Minimum Order Quantity (MOQ)?
MOQ is determined differently by different industries for a variety of reasons. Manufacturing businesses may have considerable up-front costs if they have to set up a production. In the absence of sales to cover those costs, the product isn’t worthwhile.
According to Netsuite:
“For suppliers and buyers, minimum order quantities can have several significant benefits. When managed well, the MOQ can be an important inventory control measure and keep costs down for buyers and keep profit margins in the black for suppliers.”
Minimum Order Quantity and China
When establishing a manufacturing operation in China, you will likely be asked for a minimum order quantity. Chinese manufacturers/suppliers rarely accept a purchase order unless the buyer agrees to the minimum order quantity. Manufacturers looking to establish a startup operation are often attracted to these lower minimum order quantities. Cogoport, however, views low MOQs from Chinese manufacturing partners as a red flag, not an advantage.
“If the China minimum order quantity you are being offered is very low, be wary of the supplier. A low MOQ will almost certainly mean that the products will be of a substandard quality and have poor safety standards. It might also translate to poor customer service. “
When Starting a Manufacturing Operation with a Nearshore Manufacturing Partner, the MOQ Is Not the Most Important Factor
For nearshore manufacturing to be effective, it must engage full-time manufacturing teams all year long. Although you may only be producing a few items a month, if your production runs smoothly and your teams are engaged, your investment and profits will be higher; this is especially true for complex products.
The cost of “short runs” or products that require simple, machine-based production is usually higher for both the supplier and the customer, as the client may have to make a large up-front investment (labor, equipment, supply chain management) that makes it impossible for them to reap the benefits. If your product is easy to manufacture, this is especially true. Moreover, some manufacturers may charge you a premium price if you have reached your MOQ or may stop production if you have met your first MOQ. In addition, maintaining consistent volume will allow you to determine your overhead and production costs more accurately.
If you don’t have a MOQ in nearshore manufacturing, you can take advantage of Maquiladoras. Maquiladoras in Mexico provide many advantages to businesses outsourcing their manufacturing needs in Mexico. Consistent volume production also allows you to utilize this approach in nearshore manufacturing. As a result of cost competition or labor availability, these requirements may arise.
Maquiladoras also offer the following benefits:
- Unlimited duty-free imports
- Unlimited foreign capital investment
- Limitless options for type or amount of product that can be manufactured
- Reduced manufacturing costs
- High-quality product
- Reduced transport time and cost (specifically in comparison to manufacturing in eastern countries)
Conclusion: Beware of Manufacturers With Low Minimum Order Requirements
Manufacturers with surprisingly low minimum order requirements should be questioned. You may not comply with industry or safety standards, and your product may be of poor quality. If your product or production operation is poor, the savings you may gain are not worth it.
We at NovaLink believe the best way to benefit manufacturers is to have a consistent volume of production and a highly engaged production staff. If you are looking to start a manufacturing operation that can maintain a consistent volume and can enlist a professional team for a long period of time, then you should consider manufacturing in Mexico with a nearshore partner like NovaLink.
Consumers took the “Made in China” label for granted: few questioned the quality and were often just attracted to the low price. The average consumer now scrutinizes what “Made in China” really means and asks: Is it really that cheap? What’s the quality like? And most importantly; Are the Chinese goods, despite their price, worth it?
Products of Poor Quality
Consumers always wonder why everything in American stores seems to be made in China, and that’s because it’s cheaper. Profit is why companies exist, so finding the best deal was the best way to cut margins. Usually, that meant China.
As soon as the North American Free Trade Agreement was passed in 1992, manufacturing in the United States changed. With Nearshoring, companies can now make their goods closer to home (in Canada or Mexico) and enjoy the same cost savings without having to worry about shipping them overseas.
According to manufacturing agent Michael Diliberto, Chinese manufacturers had to cut corners to compete with Mexico and North America.
First, and foremost, Chinese domestic manufacturers generally go for either the best product or the cheapest product. So, if you are not making the best, you are racing to the bottom to make the cheapest. Consumers looking at products from China are not generally looking at quality; it is assumed that if you want quality, then you buy the best one; otherwise just buy the cheap one. Manufacturers, especially in China, are not rewarded for making incrementally better products.
Paying Extra for Any Kind of Quality
By cutting corners when manufacturing to produce the cheapest products, you can save money in the short run, but it has a downside: if quality is important to the company (as it is for most), the company will have to pay more for it, and the increasing costs will inevitably lead to:
- Take a bite out of your profits
- Consumers will pay for it, as cost will be passed on to them.
But with virtually everything made in China now, competition is no longer about quality–it’s only about price. Where’s the competition in quality when everything is made in China? There isn’t any; the quality is low regardless of the brand on the device, tool or appliance. The conclusion pretty much boils down to the simple rule: you get what you pay for. In the case of “Made in China” it also means that that it is no longer the most cost-effective option.
Tariffs & Duties
We shouldn’t forget tariffs: No matter how good the Chinese goods are, you’ll pay a tariff on them: right now, the tariff for goods from China can go as high as 25%, depending on the type of item. Because of USMCA, there are no tariffs importing goods from Mexico & Canada.
Here’s Why Mexico’s Better
NovaLink understands that manufacturers don’t want to cut costs, so we offer the solution of manufacturing in Mexico instead of China. Here are some benefits:
- Shipping: As long as you have a good road and rail network, you can ship goods from Mexico to North America in less than a day.
- Wage Stability: Mexico’s wages are some of the most stable in the world; this makes investing in nearshore manufacturing very attractive to companies. In similar fashion, China’s factory wages have grown dramatically over the past 8 years, with some regions seeing increases of up to 20% per year.
- Advantages of the USMCA: When tariffs are lowered or eliminated, it decreases production costs and trade costs, which means lower prices for consumers and better profits for companies.
China Manufacturing Deception: Don’t fall for it unless you don’t care about quality, cost-effective labor, proximity and trade policy. Find out how to move your manufacturing out of China with a free consultation from NovaLink today.
Editor’s note: The following is an updated version of an article published on the Shoreview Management Advisors website in January 2019.
Trade Deficits and the Potential of Manufacturing Returning to the US Dominate Today’s Headlines
Structural trade deficits are driving the headlines. With “America First” as the justification, the US has imposed steel and aluminum tariffs, and most recently tariffs on potentially $250 billion or even all imports from China. Having built large sourcing infrastructures in China for US marketers and distributors, there are good reasons for the shift in some products from the US to lower cost countries like China. There are also American executives who have moved production from the US to China for other reasons including not clearly understanding their cost structures before and after an anticipated move. There are still other executives who have routinely engaged in this effort intentionally due to less than honorable reasons.
Compelling Reasons to Have Sourced Products From China
Ease of Doing Business Leading to Complacency Over Time
Some Tragic Reasons Why Manufacturing Shifted to China
The ethics of business in China and the US are sometimes very different. We read on a frequent basis about high level government executives being investigated for corruption. This is not confined to the Chinese alone. Many US executives have received personal financial inducements to source their company’s components or products from China. It is widespread in China and far more common than one would like to believe.
Still Other Reasons Why Some Executives Have Been Seduced by the Allure of China
IMMEX was created in the 1960s to encourage foreign investment in Mexico through preferential tariff agreements between their country and the U.S. IMMEX stands for “Manufacturing, Maquila, and Export Services Industry Program” (Industrie Manufacturera Maquiladora y de Servicios de Exportación). IMMEX is more commonly known by the name “Maquiladora“.
What Is a Maquiladora?
Maquiladoras are factories or plants in Mexico, typically near the Mexico/U.S. border. Normally, the Mexico shelter manufacturing services partner is owned and operated by a US company (although other countries, like China, can also have Maquiladoras in Mexico.)
How Does IMMEX Help Companies Manufacturing in Mexico?
Companies that use the IMMEX program reduce manufacturing costs they can’t get from other countries like China. IMMEX allows companies providing manufacturing services in Mexico to lower their manufacturing costs by shipping materials and equipment to Mexico, having them manufactured or assembled there and then having them shipped back to the U.S. IMMEX also gives U.S. manufacturers access to a source of skilled, affordable labor.
For businesses that are looking to outsource their manufacturing to a company that specializes in co-production, this approach has many benefits. Cost competitiveness or labor shortages in the U.S. may cause this need.
At NovaLink, the maquiladora model is the main source of labor. Mexico’s maquiladoras, an exceptionally talented & educated workforce with a median age of 26 years, have proven capable of building & creating sophisticated products for our clients.
The IMMEX Program: How Does It Work?
According to the Tijuana EDC, if manufacturers want to benefit from cheap labor, tax exemptions, and duty-free imports, they should simply have a sustained manufacturing process: get materials to Mexico and have them sent back as finished goods.
“It is important to notice that this exemption only works when the raw materials are temporarily imported, and then exported as finished goods. IMMEX regulates the operations of the companies under its program in order to keep everything under control, but also to improve the processes of each company and promote their growth.”
What Are the Benefits of IMMEX?
Cost, quality, and availability of labor are the biggest benefits of a U.S. business using IMMEX. IMMEX offers other benefits as well:
Unlimited duty-free imports
Unlimited foreign capital investment
Limitless options for type or amount of product that can be manufactured
Reduced manufacturing costs
Reduced transport time and cost (specifically in comparison to manufacturing in eastern countries)
The Wall Street Journal says:
“Mexico has remained consistent with costs and taxing, which allows companies to plan budgetary needs in advance and avoid any surprises that may set them back. It has also permitted U.S. companies to rely on Mexico as a manufacturing partner. As of 2015, 90% of Fortune 500 companies have investments in Mexico, making the maquiladora industry vital to the U.S. economy.”
Is the IMMEX Labor Force Skilled Enough to Handle Co-Production Manufacturing?
The Washington Post says yes. More than 13,000 engineers graduate from Mexico’s universities every year, which is more than Canada, Germany, and Brazil, which is almost twice Mexico’s size. Forbes says Mexico’s labor force is a talent pool that should be tapped into:
“Shorter term, I believe that more companies can alleviate their talent gaps by thinking outside of borders and identifying great talent globally. From my perspective, it’s challenging to identify a better fit for U.S. time zones, cultural compatibility and relevant work experience than Mexico.”
People assume that the lower cost of production means that the goods are of lower quality, but that’s not true. The labor force in Mexico, because of its high level of education and skill in production, has expertise comparable to the U.S.
When it comes to manufacturing a complex product, a nearshore manufacturing partner like NovaLink which utilizes the IMMEX, might be the best solution for you.
NovaLink has provided shelter and contract manufacturing services to various industries for over 30 years. NovaLink has an advantage whether it’s an in-demand product that requires precision and high tolerance, or one that has become commoditized.
Thousands of companies could benefit from working with the IMMEX & NovaLink.