Table of Contents
Part 1. What Is a Minimum Order Quantity (MOQ)?
Part 2. Why Do Suppliers Use Minimum Order Quantity (MOQ)?
Part 3. How Does Minimum Order Quantity (MOQ) Impact Inventory?
Part 4. High Minimum Order Quantity
Part 5. Low Minimum Order Quantity
Part 6. High MOQ VS Low MOQ
Part 7. Drive Profitability With MOQ
Part 8. What Influences Minimum Order Quantity (MOQ)?
Part 9. 3 Steps to Implement a Minimum Order Quantity (MOQ)
Part 10. Tips on Implementing Minimum Order Quantity (MOQ)
Part 11. How to Calculate Minimum Order Quantity (MOQ)
Part 12. What Happens If You Get MOQs Wrong
Part 13. Managing MOQ with Inventory Management Software
Part 14. Frequently Asked Questions
Part 1. What is a Minimum Order Quantity (MOQ)?
In the business world, the biggest asset a business can have is inventory. You need enough inventory to meet customer demand. However, you don’t want to have so much inventory that it leads to losses due to too-low demand So, you need to get a manufacturer or supplier that will allow you to order the optimal amount of your product. Most manufacturers and wholesalers set a Minimum Order Quantity to ensure that you order enough inventory for them to make a profit.
Minimum Order Quantity is the least number of items a business is willing to sell to one customer in one order. For instance, a wholesaler may list that their Minimum Order Quantity is 1,000 items; therefore, you must purchase at least 1,000 of that item when you place an order.
Wholesalers purchase items in bulk, then sell to retailers using MOQ, and the retailers are free to sell any number of items to the customers.
Wholesalers use MOQ to cover costs like transportation, while manufacturers aim at being cost-effective by producing items in bulk.
Businesses also come in contact with MOQ when purchasing raw materials. When selling the finished products, wholesalers expect to buy the products at a lower price for buying inventory in bulk.
Part 2. Why do Suppliers Use Minimum Order Quantity?
Suppliers use Minimum Order Quantity to generate sufficient profit after selling their products or services and covering their costs. Selling products and services in low quantities may result in losses because the recurring costs, such as transportation and packing, will be higher.
The MOQ from suppliers is determined by the products that they are selling. Some products have high manufacturing costs; the manufacturers will sell the product at higher prices and might require wholesalers to buy in bulk.
Suppliers aim to sell full containers of products to avoid incurring the excess labor and shipping costs that come with a split container shipment. The fewer expenses a supplier incurs when delivering products and services to retailers, the higher the profit they are set to make. Different suppliers often have different MOQs for similar products; thus, a retailer should research more than one supplier.
Part 3. How does Minimum Order Quantity Impact Inventory?
Minimum Order Quantity has a great impact on buyers and sellers alike. Suppliers set their MOQ to get higher profits, which may affect buyers’ inventory planning. When managing inventory, you need to assess your inventory turnover, also known as stock turnover or inventory turns. Inventory turnover shows the profits your business has made from its inventory by the measurement of the frequency with which you have replaced the stock within a given time. You can make better decisions concerning marketing, pricing, and getting new stock with a solid grasp of your inventory turnover.
Buyer products with a high Minimum Order Quantity to order stock that leads to more inventory on the shelves than really need means that you will have extra stock for a long period. Thus, your inventory turns are reduced.
When ordering inventory with an MOQ, the order should have a favorable discount that will serve you even when stock lasts for a longer period without sales. Instead of purchasing products with MOQ and having extra inventory, you can also spend your working capital on fast inventory.
However, using MOQ to purchase products is a good thing too. You get items at a lower price for purchasing in bulk. There are fast-moving products sold with MOQ, so the inventory turnover is still high. You will get higher profit margins by purchasing products or services at a lower price with MOQ.
You can place more orders when you find that the supplier’s MOQ matches the demand and sales forecast. However, it you should consider the following.
- You should have safety stock in case demand spikes.
- Keep reviewing your forecasts and adjusting the inventory orders.
- Be careful of any delays that the suppliers may cause.
- Order items that have a longer expiry date to avoid risks.
To be on the right track with MOQ and inventory, ensure you are stocking products in a reasonable range of variations. You can only have products with some colors, shapes, or quantities. Avoid getting a product at a lower price that might end up being of low quality, which risks losses.
You can also create an agreement with the supplier where you pay 50% of the price upon delivery and the rest after several weeks.
If you are a retailer, it is advisable to research suppliers with lower MOQ, especially for slow-moving products. Pay attention to the space you have available to store the inventory. When you acquire inventory with an MOQ for a slow-moving product, it may occupy space that could be taken up by faster-moving products.
Part 4. High Minimum Order Quantity
A high minimum Order Quantity for a supplier requires them to keep considerable inventory in stock before they deliver orders to buyers. For wholesalers to hold a large amount of inventory, they require enough working capital and space to store their inventory, such as renting a warehouse. However, a high Minimum Order Quantity typically increases the profit margin.
If the supplier does not have a warehouse, they need to rent one. Rental costs can be high, and if there are few customers for the products being stored, the supplier faces losing out twice, on the capital expended the stock and then on the rent too.
Part 5. Low Minimum Order Quantity
If your supplier can deliver a lower Minimum Order Quantity, you can benefit as a buyer.
The main benefit of a low Minimum Order Quantity is that you do not require so much working capital to pay for inventory. Therefore, you are likely to face lower obsolescence risk. However, placing a smaller order means placing orders more frequently, which takes time to review. As a retailer or supplier, you can lose customers due to delayed stock delivery and incur more costs, such as for transportation, when making frequent orders.
Low Minimum Order Quantity places you at risk of stockout. The customers will have to look for other sources, and may never return to you.
Part 6. High MOQ VS Low MOQ
High and low Minimum Order Quantities have several differences that work for and against them.
1. Working Capital. With a high Minimum Order Quantity, you need higher working capital to pay for the inventory. In comparison, a low Minimum Order Quantity requires less working capital.
2. Inventory holding costs. A larger order requires more space to keep the inventory. Therefore, a high Minimum Order Quantity means unavoidably larger warehouse rents for extra space.
3. Product Review. A large-quantity order requires product review when the inventory is purchased. For a low Minimum Order Quantity, although it is more flexible, you need product reviews every time you make an order. The product reviews can take a long time depending on how busy the manufacturers are.
4. Stockout Issues. Low order quantity puts you at a higher risk of stockout, especially if the product is in demand. A larger order ensures that you have enough stock to last for a while, even when the products are in high demand, putting you ahead of your competitors.
5. Ordering and admin costs. Admin and order processing costs are higher, thus reducing the profit margin. A high Minimum Order Quantity reduces the ordering and admin costs as you can order once or twice per year. Therefore, you can increase the profit margin through a high Minimum Order Quantity.
6. Obsolescence risk. Large orders face a higher risk of product obsolescence when the inventory faces lower demand; you could make huge losses. Lower order quantities mean fewer losses when the product does not move or moves slowly.
Part 7. Drive Profitability with MOQ
Setting a Minimum Order Quantity can lead to losing potential customers that cannot meet the MOQ requirements. Most manufacturers and suppliers set MOQ for profitability. No one wants to do deals that will lead to losses, as their business will close down in a few months.
When setting MOQ for the first time, the supplier will experience challenges such as losing customers that do not agree with the MOQ policy.
However, after a while, the supplier will experience the benefits of using MOQs. MOQ ensures that potential buyers know what to will expect from the supplier. It sets boundaries between buyer and supplier as a framework for negotiations.
With MOQ, a supplier can focus on items that yield more profit with consideration of
- Fast-moving products. Fast-moving products ensure that the supplier has higher customer inventory demand. This ensures profits within short periods.
- Products with higher profit margins. Some products have a lower production cost; the manufacturer can sell them to the supplier at a lower cost. This ensures that the supplier can obtain higher profits.
Good inventory management is essential for better profits. As a supplier, you must keep the customers happy by offering reasonable discounts and delivering on time to make more profits. Most customers look forward to suppliers who never let them down by ensuring they never stock out.
You can negotiate with the manufacturer to make the best profit from MOQ as a supplier and buy fast-moving items in bulk. Buying in bulk will leave you with higher profits than suppliers who buy in portions. You can also negotiate prices with manufacturers and become a loyal customer.
Part 8. What influences Minimum Order Quantity?
When considering MOQS, there are several different influencing factors, like raw material and order volume.
Raw Materials
Most manufacturers barely store inventory in the warehouse. They work according to the orders they get from suppliers/distributors to avoid producing too much. For instance, a factory manufacturing perishable food items cannot produce too much to store on the shelves. The Minimum Order Quantity directs them on the number of items to produce for safety purposes to avoid losses when the products go bad. For unperishable items like phones, the stock might become obsolete if it stays on the shelves long after producing too much.
Order Volume
The order volume determines MOQ. The more numerous the orders, the higher the MOQs. When a supplier wants to create MOQ, the first step is to assess the target market to avoid making a high MOQ for slow-moving products. For instance, if a product has a lower MOQ, the prices should be higher to ensure that profits are met for every person in the distribution chain.
Part 9. 3 Steps to Implement Minimum Order Quantity
There is a process that helps you implement the Minimum Order Quantity, especially for a new supplier in the business. You need to take more steps for existing suppliers than announcing the new changes in MOQ.
1. Careful calculation of target MOQ
You need to carry out thorough research concerning the target market. Focus on products that move fast, have a higher profit margin and are less perishable if the stock lasts for a little longer. The target market should be ready to purchase what you are selling at the conditions you offer.
2. Ensure that all your existing customers are aware
If you have existing customers and you are looking at implementing MOQ, start by informing them and getting feedback. Get the customers prepared for your next move. It does not matter if they can manage the MOQ or not. As a supplier, be prepared to lose customers unprepared for the MOQ system. Some customers might not have a wide customer range for the MOQ you offer or be uncomfortable with the prices.
3. MOQ enforcement
Once you inform the existing customers about the MOQ policy, start enforcing it after several weeks. Ensure that the sales reps and account managers have enough knowledge about how the MOQ policy works. You can allow negotiations with the market players but be careful with the profits you are set to make out of the MOQ policy.
Part 10. Tips on how to Make the Most out of MOQ
1. Get rid of slow-moving products
Slow-moving products will occupy the space for other products and yield little or no profit. Ensure that you get in business with products with high demand to ensure that inventory is over within a short period. It will also ensure that you spend less on storage facilities.
2. Find more suppliers and distributors
Look for suppliers with lower MOQs to ensure that you are not liable for losses in case of low demand. As a buyer, you can negotiate with the manufacturer to get a lower MOQ. If the negotiations fail, look for a middleman that gets items in bulk and sells them to you at a lower MOQ.
Part 11. How to Calculate Minimum Order Quantity
Here are the best ways to calculate MOQs.
1. Demand determination
Demand determines the amount of inventory you need to make. Therefore, it is vital to estimate demand correctly to ensure that you do not place low orders that might lead to stockout or high orders that leave you with too much stock, leading to losses.
2. Holding cost calculation
Holding cost is the amount you incur to store the inventory, like warehouse costs. Storage expenditure is higher when the inventory is stored for longer. It is best to get MOQ on products with higher demand so that the storage period will be shorter. You should also consider factors like refrigeration for perishable goods that incur high power expenses.
3. Break-even point calculation
You should know the break-even point when making Minimum Order Quality calculations. It is essential to have a low per-dollar unit to exchange for the highest order value.
4. Derive your MOQ
If you get higher customer demand, you can increase the level of MOQ. It will make more profit from bulk buying. You can also set a lower MOQ if more customers are willing to purchase at the given MOQ, and at the same time, you are set to make profits.
Part 12. What Happens if You Get MOQs Wrong?
The main reason MOQs go wrong is by definition. Does MOQ mean a box, pallet or container? Some suppliers work with weight while the buyer works with pieces which may lead to confusion between the two.
You can face the following challenges when you use the wrong MOQ reference.
1. Receiving excess or too little stock.
When the supplier and customers have the wrong MOQ, the amount of inventory ordered can be too much or too little. It depends on the measurement units used. For instance, if the MOQ is one pallet, and as a buyer, you expected a box, the inventory will be too much.
2. Wastage of working capital.
You can spend much more than expected due to the wrong MOQ. This can also lead to losses as you ordered the wrong inventory.
3. Stock-out and obsolesce risk
The wrong MOQ can have you receiving less inventory, leading to stockout due to high demand. In other instances, the manufacturer or supplier can deliver more stock than expected, leading to losses due to a lack of enough customers to clear the stock. Stockout see your customers go elsewhere in search of the products they need.
4. Inefficient cost of ordering.
This happens mostly when you have ordered more inventory, only to receive less. You will incur more expenses on transportation costs when ordering the required amount, and the product review process can take a long period.
Before making a Minimum Order Quantity, it is best to confirm with the suppliers or manufacturers to ensure that you are on the same page when ordering certain quantities of inventories. It will save you money and time.
Part 13. Managing MOQ with Inventory Management Software
MOQ calculation is hard, especially when using a pen and paper. For most companies, the calculation gets too complex and can lead to confusion. Some details like market conditions, order quantities and amounts can disappear without the help of calculation software. There is software available, such as supply chain management software that takes part in ERP, that gives you an insight into quantity order details and profit margins. The details are laid out on the dashboard for easy visualisation.
The software enables you to see the latest information and helps other company members understand the profit margin and the primary indicators of the company's performance. For MOQs to function well, the company should generate more money than the costs spent to make more profits and keep them in business. To create the best MOQ, a company needs a solid estimate of how much a single unit costs during the production process. The costs should include raw materials, labor costs and other expenses. The costs should aid in calculating how much the product can be sold to make profits. The costs should be as minimal as possible to attract customers and stay ahead of the competition.
Part 14. Frequently Asked Questions
1. How do you set a Minimum Order Quantity?
You should consider the gross profit margin for every item you sell and compare it to the total production cost. The costs should include the cost of raw materials, transportation costs, and marketing costs. The Minimum Order Cost should ensure that the sales you make yield some profits.
2. What is a Minimum Order Quantity?
The Minimum Order Quantity is the lowest number of items a customer can buy in a single order.
3. How do you determine the Minimum Order Quantity?
To get the best Minimum Order Quantity, consider sales volume, expenses such as transport and marketing, and profit per unit.
4. What is MOQ in the supply chain?
There are many types of MOQs in the supply chain. Different suppliers have different Minimum Order Quantities for items that buyers need to purchase.
Conclusion
Well-chosen MOQs can benefit buyers, suppliers and manufacturers depending on the products, price and the amount they spend on production. Buying in bulk ensures you can get discounts and never run out of stock. However, ensure that the products are fast-moving to protect yourself from losses. When placing orders, you should estimate the inventory so that you do not run out of stock or purchase too much.
People Also Like:
Ultimate Guide to China Sourcing
Sole Sourcing vs Single Sourcing vs Multiple Sourcing Category
Ultimate Guide: In-Depth Insights on Global Sourcing
How to Find a Manufacturer or Supplier For Your Product
20 Things You Never Knew Were Manufactured in China
Sourcing in China? Read more about China Manufacturers
Source the latest products from verified suppliers via global sourcing platform, and subscribe to our magazines for more in-depth insights and product discovery.
