MOQ & Small Run Manufacturing Options

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Okay, Good morning, this is Tom at Product Launch Hazards and this is my office hours for what is it? It's Tuesday, May 15, and I wanted to talk today about a subject that is probably of interest to just about everybody who's a member here, but in particular anyone who is purchasing products to sell either on their own website or at Amazon. And I just want to talk about minimum order quantities and small run manufacturing options. Options and considerations. And 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, I guess 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. And I've dealt with a small run both here domestically and small run in China and of course large run manufacturing issues. And that's another subject for another office hour. If any of you have that issue are interested in that subject, let us know right into product launch hazards and let us know you'd like to hear that type of topic. And we'll get that on schedule. But for today we're talking about small run and minimum order quantity. So 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. Then again, regardless of where you're manufacturing, it's a very common term. There's a couple other terms I'm going to define here in this session regarding that really go hand in hand with minimum order quantity and it's a difficult thing. Minimum order quantity is something you want to really 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 really well and 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 where, well, if it sells well, I'm going to need this kind of supply and I want to make sure the manufacturer can supply that, and there's nothing wrong with that. You definitely want to make sure you have a manufacturer that can meet your capacity requirements, but 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 and the manufacturer is going to want to probably charge you a higher price for 500. So like I said, 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 the your minimum order quantity to be 500 if that's what it is, 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 or it's a custom size of a product or any kind of 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 really well, they want a piece of that too, and they can go to the manufacturer and buy it just like you can. So having something that's unique to you, something that's not easy for them to get, at least that there's higher barriers to entry is encouraged for obvious reasons. But that also comes with the consequence of there's probably minimum order quantity. And I'll give you a couple examples of minute why, and I think 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 at different kinds of manufacturers and with different kinds of production lines, different kinds of machines that are being run. So I'll give you an example. So let's say you're even producing a product already. Well, the manufacturer's producing a product and I'm going to use one of my products as an example. Example where this is what I was manufacturing in the late 90s and early 2000s are pens. These are stylus pens. I think I may have shown you something like this in the past. This is a plastic molded, it's a stylus tip and Then the ink extends beyond it. And these were very popular in the days of the palm pilot, late 90s, early 2000s. And black, as you can imagine, pretty easy to get. And even white, pretty easy to get. Ignore the logos for the moment because that's a whole other subject. But let's say you wanted to make one in this green color. And even though these molds exist and the manufacturer was making them all the time for us, when it came to getting custom colors, which we started to do because aside from at that time, Amazon wasn't even selling products, they were only selling books. So we had to sell these on our own website and had our own hard coded shopping carts and the whole thing. But when we had a manufacturer who bought some of the retail product, and then they want their drug logo printed on it and they want to buy quantity of them in particular color. And they would be actually wanting large quantities too. I mean, it'd be 10,000 or even 50,000 pens. But the problem is they wanted 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. So we talked to my manufacturer and at that time, as we're doing this, we're making these in China and shipping them over to the US and we printed on them here in the US but we need to get the actual color. So we're going to mold this in this green color. So we send them a pantone color and then they're going to come back to us with, okay, yes, we can make it a new pantone color. But the minimum order quantity for that color that you would buy is 1000 or 2000. Honestly, I don't remember what the minimum order quantity was because it's been, gosh, I don't want to think about it. It's been at least like 17 years. But 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 kind of translucent colored plastic, and you mix colorant with it in the molding process. And when you mix colorant, they have to buy it was something like a 50 pound bag of colorant in order to make me a dozen pens in this color. Now a 50 pound bag of colorant is going to last you probably hundreds of thousands of pens, because these pens only take a Very small amount of plastic. So they would say, hey, minimum order quantity you need to buy of this customer 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. And I think there may have been a smaller quantity of colorant like a 5 or 10 pound bag of colorant. It's been a while since I've done that. But they had to buy a minimum amount of colorant in order to make it. You just can't make it and make enough to mold 10 pens. So they would cover their cost and set their minimum order quantity. Sometimes the manufacturer would say, okay, we'll make this custom color for you. We have to buy this amount of colorant and we're just going to charge you for the colorant. And it'll be here, it'll be yours, it won't be anybody else's. And 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. So it was just think of it like a tooling charge or something, right? Or a setup charge. But oftentimes these types of things come into play in determining what the minimum order quantity of a product that a manufacturer is willing to sell to you. Basically, it's an amount that makes it 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 quoted, say, hey, you want a quote for buying 100 and 500 and 1000 and 10,000, you can run the gamut so you can really 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. But that minimum order quantity, there's many different things that can go into it. The colorant example is just one. And 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, seven or at least running two shifts a day, 16 hours a day, and it's down the other eight hours because maybe the plant doesn't run a third shift. And in order to make your sample, they have to not be using that machine to produce production Products for other companies. Now, some factories are not going to be completely at 100% capacity. And actually, you hope they're not, because you want them to make your product and give your business some priority in their schedule. But oftentimes, the best machines that they have are being used for production. And so in order to take that machine offline for production, load your custom color material in it, or your jigs or tools, or there's all sorts of 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 gonna make in production is actually what you want to buy that you know, you gotta produce on those machines. And to do that, they got a break into production. They're not producing for somebody else. So there's a cost associated with that. Now, 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, or whether it's a mold or an extrusion die or wood cutting knives. I mean, there's all. It could be a host of different things, right? Put your printing plates in the machine, put your ink formulas into a machine. There's all different kinds of considerations. If you're doing fabric weaving something, it's putting the right fibers on shuttles to run in the loom. There's always some kind of a setup process that goes on, and there's a cost associated with it. And so they oftentimes will either charge you a setup charge or they will tell you, yeah, 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, or 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 cost that's real, that's associated with that. And in order to make it worth the company's while to bother doing it, they need to sell a certain number of pieces. And 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. And so there are many things that creep into minimum order quantity. So I just 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. More. 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, from to be molded and they buy the colorant. Now, 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. 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. And instead you could just have really one batch of raw material used across a lot of different products. And just then the smaller amounts of colorants for each different color that you run, they're going to mix the colorant in house. But you have outside sub suppliers, outside distributors that have their own rules in business. And oftentimes, 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. Well, it's not just 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 just financial reality. The sub supplier, they may not be a huge customer to the sub supplier. And the sub supplier isn'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. So 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. And they'll tell you either they can and here's the price or they can't and you need to buy this much. If you just go and tell them, hey, let me know what your minimum order quantity is. You're sort of inviting them to push that up to the higher side that makes it more worth their while. So if you already have an idea of what you want or even a suspicion, just get a little more minimum order quantity. And I think in this day and age, vamasan 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. So it probably won't be a foreign concept to them for you to ask for 100, 150, 200 minimum order quantity. But 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 and their schedule and things like that. So let's see a couple other things that go hand in hand with minimum order quantity. And I only want to mention this because usually you're getting the minimum order quantity number in some kind of a quotation and you'll hear more of some of these terms from other people, especially more involved in the shipping and logistics side of the business. But you'll hear terms, you'll get a quote with your minimum order quantity and then quote for larger quantities and then you'll have another term on there that's either EXW or fob. And 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 and 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 usually get quoted is fob, which is freight on board. And what that really 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. That is going to say FOB Yantian or FOB Shanghai or FOB any other port city in China where it would be going out. And 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. So 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. So they will get it right to logistics company and that that cost is included in your price. And that's important. I mean, if you are shipping a large quantity and it's going to go via ocean, okay, 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, that it's. And you can wait a few weeks for it to 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 really your only other option for Major. And so they're going to include that transportation to the port. And that's just one more detail you don't have to worry about when you're doing your logistics company and 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. X Works is just. They're making it, it's at the factory. They're not paying to send it anywhere. Now that may be perfectly fine. I'm going to go back to my example of the pens again. So these pens, we started manufacturing these in the US in low quantity. And then 1998 I said, I went to China and I started manufacturing them at a company actually in the Shanghai area. And we started ordering pens in very large quantities. We were ordering them in tens of thousands and in some cases hundreds of thousands of pens in an order because we started doing very large volume mostly for these drug companies that were giving these away to doctors because they had drug databases at that time on Palm Pilots. And so this was very relevant to the work that they were doing, which by the way, you can't do anymore. If anybody out there is in the pen business. The FDA has changed that. You can't give pens away to doctors anymore for some reason sort of beyond me. But okay. So in any case, 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. And when we analyzed the cost difference the between ocean freight. Now this is at the time, this is a number of years ago and a lot of things have changed, but I think a lot of things also have not changed. And costs of transportation have only gone up every which way. But we would often. Actually I don't think we ever shipped any of these pens ocean freight. We ship them all air freight. Now part of that is we were an east coast company at the time we were in Rhode island and now I'm in California. Maybe that would be different. But at least getting the pens to Rhode island in every case because of the small size of the product on a per pen basis, the difference between air freight and ocean freight was so insignificant we air freighted everything. So in that case we used the quote ex works, exw the factory. And 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. So not specifically an MOQ issue, but I just 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 I think, a representative of world craft logistics. Then this is their entire business and they know that a whole lot better than I do. So definitely they're the experts there. I just have some experience in it. So minimum order quantities, small run manufacturing options. Now 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 maybe you can make a small run of product or have it made for you here in the United States and don't need to go to China and starting out in a very small volume, that makes a lot of sense. I have a couple of clients I'm doing some work for right now that are making, I want to call them, I can't really disclose them, but kitchen accessories, I'll call it that, made of silicone. And there are plenty of processes here in the US for prototyping those things in real materials. Here it involves 3D printing, rapid prototyping, but then you can actually 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 1000. 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 can make 100 of something or even 50 if you wanted to start that small. And we have several examples of things we've been doing with clients where we're doing that. And even if it goes beyond just 3D printing. Sometimes you can. In the case of a silicone mold, I'm going to stick with that for a minute because it's a good example. 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 and the big obstacle is usually tooling. And it's expensive to get a tool made to do that. And the reality is we can 3D print a mold here in the US and, and then pour silicone into it and make a short run. And 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 you cost per piece may be a lot higher than is acceptable in the long run. Maybe on those first hundred 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 know you can go make it and make a lot of profit if you invest in a tool and manufacturing and logistics of doing it overseas and bringing it into the US but I would say it's perfectly acceptable. 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 just 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 maybe you consider it a marketing expense. You're proving that a market exists, maybe even if it costs you $1 per piece beyond what you can sell it for. And what I mean by that is, at the end of the day, you're selling this small run of 100 on Amazon. You're going to charge $29 per item to sell it. And then the reality is each of those Items cost you $30 to make it and deliver it and sell it through that whole system. So you're sending another dollar out the door with everyone than you're ever going to make back. But that is the cheapest market research expense you will ever have to prove that either works or it doesn't work. And if it doesn't work, you just saved yourselves many, many more thousands or tens of thousands of dollars doing a bigger run on something that's never going to sell. Or you proved, wow, this sold really quick. I can definitely sell these now. Maybe you have a lot more confidence to go a little deeper in your order and get a better price and not just order 500, but order maybe 2 or 3,000 or 5,000. You always want to be cautious going deep on inventory. But my point is small run manufacturing, there's a lot of options available for you in the United States to go and do that. And there also may be options even doing some things in Asia for small runs. And like I said, manufacturers are getting much more accustomed to the realities of short runs and getting started in a product. So there you go. Those are my thoughts for today on minimum order quantity and small 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, you know, in Rhode Island, I'll show you again. Here's a version of our pen that is metal. It's a high quality one. This was made in China, but its predecessor was. Here's one example of a predecessor and it's, it's very different. We made this in Rhode island and sometimes this was black, sometimes it was still the same plated brushed finish as this. Same with the end here. These weren't always plastic. And then here's the other version. And this one was a lot more expensive to make in Rhode Island. And this whole barrel is one piece, everything gets put in from the very top here, whereas the other one is split in the middle and these come apart in two halves. This was definitely a short run manufacturing product. And then we had the larger volume one. All a 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. And in short run you have to consider realities of tooling and manufacturing. And usually you do things a little differently. So that's another thing I guess I'd like to say about that. Let me see. I did not have any questions written in for this one, so I don't really have any available to answer. And this is a little early in the day and I don't have anybody live on this session either. So I think we're getting close to probably wrapping this one up. But if you're watching this on the recording at any point and you do have any questions, please, you know, feel free to write in and I'll be happy to revisit any of those questions or issues you may have regarding intermodal quantity and small manufacturing run. Short manufacturing run options at a future office hour. Okay, well, great. Thank you so much. And I'll be back for another office hours in a couple weeks. Thanks very much. This has been Tom on Product Launch Hazards.

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