With several incentives from the Government of India, under the Make in India campaign, manufacturing activities have received a phenomenal boost. The Government also introduced 100% FDI (Foreign Direct Investment) in contract manufacturing to encourage Indian companies to become a viable alternative for Chinese manufacturers.
For example, Company A is not producing goods on its own and outsourcing them to another Company B in India. Company A can still get up to 100% FDI under an automatic route. It has led to more investments in the contract manufacturing industry, and overall, India's manufacturing sector has received a much-needed impetus.
Hiring contract manufacturing services seems a lucrative option for many budding businesspersons. If you are looking for the best Indian contract manufacturer to start your private label business, you must know about MOQ and understand how the number will affect you.
Minimum Order Quantity (MOQ) is the minimum number of units a manufacturer will produce per order. It includes the expenditure to cover set up costs, administrative expenses, raw materials, and other expenses that the manufacturer will undergo on your behalf.
Why do Contract Manufacturers have MOQ?
When you hire a contract manufacturer, they will produce the goods on your behalf and brand them according to your requirements. The more customized the product specifications, the higher will be your MOQ as no other buyer will be willing to buy the customized product. MOQs of any private label products are dependent on:
- Time taken for the production run
- Efforts required to assemble
- Complexity/customization involved in packaging
- Capital investment.
MOQ and its impact on your Private Label Business
Whether you are a start-up business or an established player in the industry, MOQ will impact how you manage your inventory. To avoid possible stock-out situations and meet the demands of your customers regularly, you need enough stock of products. So, the MOQ should be a number that complements your inventory needs. Here’s how you can ensure that the contract manufacturer’s MOQ aligns with your business goals.
1. Consider Consumer Demands
When calculating consumer demand, you must look at past data and consider demand forecasts for the coming months. Only looking at past data can lead to erroneous calculations. Consider seasonal demands, marketing efforts, and the production timeline to calculate an accurate number. It will tell you whether the contract manufacturer's MOQ matches your requirements.
2. Calculate the Warehousing Costs
Holding inventory for a very long time can pressurize your sales channel. Also, it may affect the efficacy of your product, especially if you are selling private label nutraceutical products or green food supplements.
Do you have warehousing space to store the excess products that the manufacturer will ship to you? Do the products require special warehousing facilities? Many contract manufacturers hold products on your behalf for a pre-decided inventory cost. Does that sound like a profitable option for you?
3. Ascertain the EOQ (Economic Order Quantity)
Economic Order Quantity is one of the oldest concepts to reduce your logistical costs and warehousing expenses. It refers to the ideal quantity that a company/business should purchase to reduce stock-out problems, overstock situations, and inventory costs. The main goal of EOQ is to help you streamline costs and identify the maximum units that you can purchase. It focuses on bulk buying to decrease the total logistical costs involved in multiple shipments.
4. Choose a Manufacturer
When choosing a contract manufacturer, the MOQ should not be higher than EOQ. Otherwise, you may end up spending more on inventory. It is essential to negotiate with manufacturers and work out a beneficial deal for your business.
In addition to MOQ and EOQ, calculate the reorder point, order lead time, and total purchasing cost per unit. It will help you to make the decision quickly. Additionally, you must understand that choosing a contract manufacturer is not all numbers. Check whether they have an ISO certification and other relevant documents to manufacture quality products. Remember that the manufacturer will be your partner for a very long time, and you must ensure that your goals align.
Author
Balram Patel
Balram Patel started Foodicine along with his brother. His expertise lies in guiding clients and helping them transform ideas into successful business solutions. With his experience of Ayurvedic herbal supplements, he will leave no stone unturned in providing the best third party contract manufacturing services to you.