When placing an order with some manufacturers and wholesalers, they may require a minimumorder quantity (MOQ). That means sometimes manufacturers, suppliers and wholesalers willturn away some customers if they are not willing or able to meet the minimum order quantity.
While it seems counterintuitive that turning away business could lead to higher profits, it'sessential to understand how minimum order quantity works and why some suppliers may usethem, particularly in low-margin or highly customized businesses. If managed carefully,minimum order quantities can increase your bottom line.
What Is Minimum Order Quantity (MOQ)?
Minimum order quantity is the fewest number of units a business is willing to sell to asingle customer at once. While a retail store may be happy to sell a single t-shirt or onehead of lettuce, it isn’t usually profitable to sell a single unit. They may require aminimum order of hundreds or thousands of units, depending on the product.
Many manufacturers sell in bulk to wholesalers, who then sell in bulk to retailers using anMOQ. Then individuals can go to the store to buy just one or two of a product.
Minimum Order Quantity (MOQ) Defined
Here’s a common definition of minimum order quantity:
A minimum order quantity is the fewest number of units required to be purchased atone time.
To better understand what MOQ means, here’s an example. Assume a wholesaler sellswidgets for$100 each. The supplier has a minimum order quantity for widgets of 100 units — or atleast$10,000. The MOQ can be done a per-unit basis, or a dollar figure. Regardless, this MOQrepresents at least the minimum for the company to turn a profit on a particular order.There may be set up costs, administrative expenses, minimum amounts of raw materials thesupplier can order and other constraints that go into this calculation.
Why Do Suppliers Use Minimum Order Quantity (MOQ)?
Generally, suppliers use MOQs for one reason: sale margin — or the amount of profitgeneratedby the sale of a service or product. If a supplier sells products at a minimal markup or ona tight margin, it can take a large volume to break even after factoring in overhead andother recurring costs.
Different industries have different reasons and ways of determining what the MOQ will be. Oneexample would be a manufacturing business that has to set up a production run may havesignificant up-front costs. Unless it sells enough units to make up for those costs, itisn’t worthwhile.
A wholesaler or manufacturer is going to sell cases of products, and they’ll want tosell afull case to avoid the additional labor and costs associated with breaking them down andshipping in partials. If they were selling shampoo, for example, they would ship one casecontaining 12 units, so the MOQ would be 12 — one case.
How Does Minimum Order Quantity (MOQ) Impact Inventory?
Minimum order quantities have noteworthy effects on inventory for both the sellerand the buyer. Sellers that choose a high minimum order quantity have to produce andpossibly warehouse large quantities and the MOQ impacts how they manage inventory.Buyers, on the other hand, have to decide if they will need at least the MOQ of a product,or else they’ll need to look for another supplier with a smaller MOQ or considerinventorystorage options. Buyers have to consider things like warehousing space and potential savingsrealized by ordering in bulk.
High Minimum Order Quantity (MOQ)
When suppliers have a high minimum order quantity, they may need to keep a substantial amountof inventory on hand to fulfill orders. If suppliers want to keep a low inventory and usejust-in-time inventory management, they may need longer lead times to fulfill orders. Largerinventory requirements tie up a significant amount of working capital and take up warehousespace. But they lower administrative costs because products or raw materials can be orderedless frequently, which can result in bulk savings from various materials and component partsdown the supply chain. And while there is a lower risk ofstockouts, there is an increased risk of products becoming obsolete, especially for itemssuch as electronics.
Low Minimum Order Quantity (MOQ)
With a low minimum order quantity, suppliers don’t need as much inventory on hand fororders,as they’ll likely see a lower average order size. That could mean less inventory withhigherinventory turnover. LowMOQs can add pressure to your sales team, who may need to manage more customers and workharder to drum up business. There are higher administrative costs because of more frequentordering. And while suppliers with a low MOQ can risk running out of stock, they lower theirrisk of obsolescence.
High MOQ vs. Low MOQ
Typical minimum order quantity levels vary by product and industry. Here are common inventoryand lead time guidelines for high MOQ and low MOQ businesses:
| Inventory Required | Typical Lead Times | Better Margin Match | |
|---|---|---|---|
| High MOQ | High inventory levels | Higher lead times | Low margin products |
| Low MOQ | Low inventory levels | Lower lead times | High margin products |
Benefits of Minimum Order Quantity (MOQ)
For suppliers and buyers, minimum order quantities can have several significant benefits.When managed well, the MOQ can be an important inventorycontrol measure and keep costs down for buyers, and keep profit margins in the blackfor suppliers.
Benefits for Suppliers
Improved cash flow: When product prices and order sizes are managedwell, an MOQ can help suppliers have a healthier, more predictable cash flow.
Lowered inventory costs: In some cases, MOQs can keep inventorycosts in check. Instead of making an order large enough to make a profit and thensearching for many small buyers, some orders are only produced when there is a buyerready to purchase an amount that will be profitable for the supplier. This canreduce reliance on warehouse space and lower inventory costs.
Better profit margins: By carefully using MOQs, suppliers can bettercontrol their profit margins, so goods are only produced when there are worthwhileprofits behind the order.
Benefits for Buyers
Economies of scale (bulk savings): Buyers often know they’regettingthe best price per unit when working with suppliers with MOQs. Sometimes the savingsfrom buying in bulk can mean more profit for buyers — even with increasedwarehousecosts or having to sell items at a discount to increase the inventoryturnover.
Improved relationships with suppliers: The relationship with asupplier of raw materials and products is of utmost importance. Understanding therelationship of the buyer’s economic orderquantity (EOQ) — or the ideal quantity of inventory — and theMOQ can be adelicate balance. And when the MOQ is more than the EOQ, buyers can sometimes workwith suppliers to negotiate possible compromises or solutions, such as ordersplitting with other buyers.
Drive Profitability With MOQ
Why would a business set a minimum order quantity that could price out some potentialcustomers? It all comes down to profitability. Businesses shouldn’t engage in salesthatlose money. So, if suppliers have a threshold amount of a particular product where itbecomes profitable, an MOQ can be a sound business practice.
The adjustment period may be a challenge when setting an MOQ for the first time. But thegrowing pains may be worth the reward suppliers can reap. The MOQ helps prospective buyersknow what to expect. And it can shift the entire business culture to focus on only theorders that will be profitable for the company, rather than focusing on dispensing manysmall orders. Again, this may come with challenges, but when suppliers specialize infulfilling larger orders, they can offer a more consistent and positive customer experiencethat ideally leads to repeat orders, other large-order customers and profit growth.Suppliers may also choose to have varying price points with discounts for higher-quantityorders to help make the transition to working with MOQs or varying their approach to workingwith buyers.
Types of MOQs
MOQs are a reflection of the economic constraints for suppliers associated with processing anorder. These can include materials, machinery and other costs of executing the order, likeshipment costs. The constraints can also be administrative, such as bookkeeping and billing.
Simple MOQs are usually defined as MOQs with one lower limit — either in a dollaramount orin a quantity of units, sometimes called “eaches”. Complex MOQs have multiplelimits and caninclude minimum parts or materials, dollar amounts and/or finished products.
Simple MOQ
Many companies that aren’t retailers deal with at least a simple MOQ. Thismeansthere is a single restraint on orders. That lower-end limit could be a minimum spendor a minimum quantity ordered. For example, a book printer will likely have aminimum order required. It simply wouldn’t be profitable for most printers toset uptheir presses, get the printing plates made and do a full print run for a handful ofbooks. They’ll likely require a minimum order number that will make the printrunprofitable.
Complex MOQ
Instead of dealing with just one restraint, complex MOQs have two or morerequirements for orders. A good example might be a clothing manufacturer. For peopleordering products, it’s not just a simple minimum number of items. Usuallythere areother restraints, such as a minimum length of fabric per color and fabric type used,a minimum number of pieces or units, as well as a minimum dollar amount. For buyersto place an order, all these conditions must be met.
As the name implies, setting up complex MOQs for suppliers isn’t always simple, and alot ofinformation goes into the calculations. Suppliers need to understand the granular costinformation of each component piece, as well as the labor and administrative costs that gointo the order.
What Influences Minimum Order Quantity (MOQ)?
When considering MOQs for suppliers, there are two primary considerations: raw materials andorder volume.
Raw Materials
Suppliers of products have to deal with their own MOQs down their supply chains, just likewholesalers buying finished products from the suppliers. Factories that make the rawmaterials for the suppliers rarely store inventory. Instead, production on polymer plasticthat will go into making bottles, for example, will only begin after receiving an order. Andthat order will likely have an MOQ. So, a supplier of custom-made water bottles will need toconsider the minimum amount of polymer plastic, as well any other components that would gointo the production, when setting up their own MOQ for buyers of their goods.
The shelf life of items must also be considered. For example, when setting up an MOQ forfoodstuffs and other perishable goods, how long those goods can last before spoiling shouldbe a part of the calculation. Even for electronics or other durable goods sometimes shelflife should be a consideration. They may not spoil, but they might become obsolete or lessdesirable as new products are released.
Order Volume
Order volume is at the heart of MOQs. Finding that break-even point for when an order willbegin to make profit for a supplier is pivotal.
Before creating MOQs, suppliers should consider who they’re selling to, and whothey’d liketo be selling to. For example, if their primary customer base is small retailers, the MOQwill likely be much lower than if the customers are big-box retail chains. And pricing ofproducts will need to be adjusted accordingly (e.g., higher prices for lower MOQs to ensurethey can still turn a profit). If the supplier usually sells low-margin or high-volumeproducts, they may need a high MOQ to break even.
How to Calculate Minimum Order Quantity (MOQ)
Calculating minimum order quantity varies in complexity by product and industry. And itlikely will not be static. As different component parts and raw materials change prices downthe supply chain, suppliers may need to alter prices and MOQs to stay profitable,particularly if operating on low margins. Inventory management software can help suppliersstay on top of the dynamic nature of MOQs and ensure accurate calculations. Software that ispart of a larger enterprise resource planning (ERP) platform can be particularly useful. ERPsoftware brings together data from various areas of your business into one digital ecosystemto help with even more accurate and insightful information. For instance, supply chain management software isintegrated with the finance management platform so suppliers can have accurate, up-to-dateinformation about raw materials and component parts to use to calculate ideal MOQs.
There is no set formula for calculating MOQs, even for a simple MOQ. But here are some basicsteps to consider when getting started making MOQ calculations:
Consider demand: Look at historical data and forecast demand. Ifsuppliers are traditionally receiving orders for around 500 units, suddenlyimplementing an MOQ of 5,000 might not be feasible. Other considerations are thingslike seasonality and lead times, or how it takes to produce an order.
Calculate holding costs: How much is a supplier paying to storeproducts? This may vary by the specific item. For example, some products need to bestored in refrigerators or may have odd shapes, making inventory management moredifficult. Holding inventory for long periods of time is never ideal, and thesecosts need to be accounted for in MOQs.
Find the break-even point: If a supplier were to sell 50 units at afair market price, would that supplier turn a profit? How about 500? They’dneed tocalculate all the overhead costs like labor, setup charges and other production anddelivery costs. Eventually, they’d find the break-even point, which is a vitalpartof determining MOQ.
Set your MOQ: After gathering all the data, set MOQs for eachproduct and create a strategy for how to implement it. If necessary, use bulk-buyingdiscounts and other incentives to increase the average order volume (AOV). And workwith customers where possible to maintain relationships.
For example, let’s look at a buyer that purchases 550 unites from a suppliereverysix months, but the supplier wants to implement a 1,000-unit MOQ. That suppliercould work with the buyer to order 1,100 units at a discounted price and ask thebuyer to either pay in installments, pay a carrying fee to cover thesupplier’sinventory costs or the buyer may store the products because they’ll be used inthatsame year.
Three Steps to Implement a Minimum Order Quantity (MOQ)
For suppliers that are just getting started, or those that would like to implement an MOQ onsome or all of their products, it’s important to be deliberate with the process. Ittakesmore than simply announcing the new change or arbitrarily deciding on an MOQ that would beideal for the supplier’s business without considering market conditions. Here are afew tipsto consider before getting started.
Carefully calculate the target MOQ: Start by finding the appropriateMOQ for each product (see tips above).
Inform existing customers: For suppliers that are starting toimplement an MOQ and already have existing customers, let them know well in advance— even if they normally meet the MOQ. Work with them so they understand whythe MOQis being implemented. And try to find ways to continue working with buyers thatdon’t normally order enough to meet the MOQ. Suppliers should also understandthatthey may lose some customers.
Enforce the MOQ: The MOQ only works if it’s enforced.Suppliersshould start conversations with sales reps and account managers early so theyunderstand how the MOQ works, and what possible recourses are available. There maybe instances where negotiations can take place, but the sales team needs tounderstand when and how profits are made on the orders of each product.
Manage MOQ With Inventory Management Software
Calculating an MOQ should not be done with pencil and paper. For the vast majority ofcompanies, it’s too complex even for basic spreadsheets. Costs fluctuate, marketconditionschange, and details like order quantities, amounts and others can get lost without the aidof software to manage your inventory. Supply chain management software that ispart of an overall ERP platform will help you dig deep into the details of order quantities,profit margins and other details. This information can be displayed in dashboards withsimple-to-understand visuals. Being able to see at-a-glance and up-to-date information notonly helps you determine your ideal MOQs, it can also be a powerful tool for other teammembers to understand key details, such as profit margins and other key performanceindicators from your business.
MOQs start from a basic premise: Companies have to take in more money than they spend inorder to turn a profit and stay open. This can start at a fundamental level by looking atindividual products to see what it costs to produce them — including hard and softcosts —and calculating how much you need to sell them for and the minimum order to make profit.This MOQ may be straightforward and be a simple dollar or unit minimum order, or it may becomplex with several different component parts.
Regardless, calculating MOQs and tracking order information is aided with inventory managementsoftware. The platforms can serve up dashboards to help you understand costs, supplychain details and other information. Those dashboards can be an important educational toolfor sales and management teams, so they better understand why MOQs are in place and how towork with new and existing customers to meet order minimums.
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Frequently Asked Questions
How do you set a minimum order quantity?
To decide minimum order quantity, look at the gross profit margin per unit sold and compareit to your overall production costs. This should include hard costs for things likematerials, as well as soft costs, such as marketing and administrative expenses. Yourminimum order quantity should ensure that every sale is profitable.
What is a minimum order?
A minimum order is the smallest order size a business is willing to fulfill. That size willvary by industry and supplier.
How do you find minimum cost order quantity?
Consider overhead costs, sales volume and profit per unit to determine the ideal MOQ.
What is MOQ in supply chain?
MOQ stands for minimum order quantity. In a supply chain, you may see various MOQs. Forexample, a supplier of a finished product may have a minimum number of units required forpurchase (like a minimum number of books printed). And even the supplier may see other MOQsdown the supply chain, like that same book printer may see a minimum amount of paper perorder requirement.
