When it comes to ordering products, many companies have a minimum order quantity (MOQ) that must be met before an order is placed. This can be frustrating for small businesses that need only a few items to get started. In this article, we'll explore what MOQ is, why it exists, and some tips on how to work around it. By the end of this guide, you'll have a better understanding of MOQ and how to make it work for your business. Let's get started!
Table of Contents:
What Is Minimum Order Quantity (MOQ)?
Minimum order quantity (MOQ) is the minimum number of products that a company must order from a supplier in order to receive the best price, typically for that product. The MOQ can also be a limit on the number of products that a company can order at one time. The cost savings associated with MOQs are usually quite substantial, so it’s important to understand how they work.
MOQs can vary greatly depending on the product and supplier involved. For example, some suppliers may require a large minimum order quantity while others may be willing to accept orders of any size. Additionally, different types of products may have different MOQs.
The primary purpose of implementing MOQs is to ensure that suppliers don’t have to dedicate too much time and resources to fulfill small orders. For example, if a company needs only 10 widgets from a particular supplier, it would likely be more cost effective for the supplier to fill an order of 100 widgets instead.
What Are The Different Types Of MOQ?
MOQs are a supplier's way of protecting themselves from economic loss when fulfilling an order. This could be in the form of costly materials and machinery, or even something as seemingly small as bookkeeping fees.
A MOQ, or minimum order quantity, is the lowest amount of product that a manufacturer will sell. A complex MOQ has more than one limit and may involve dollar amounts, finished products, etc., while a simple MOQ usually just refers to either an amount in dollars or the number of units.
1. Simple MOQ
Most businesses, even those that are not retailers, have what is called a MOQ. This refers to the only limit on orders, and that lower-end limit could be either a minimum spend or quantity ordered.
For example, let's say you want to print a book. Most printers have what they call a "minimum order requirement." This means that the printer needs to make at least a certain number of books in order for the job to be profitable. If you don't meet this minimum, the printer won't do the job.
2. Complex MOQ
Instead of having to meet just one requirement, complex MOQs have two or more requirements for orders. A good example might be a clothing manufacturer. For people ordering products, it’s not enough to simply order a minimum number of items. Usually, there are other restraints, such as needing a certain amount of fabric per color and fabric type used or meeting a minimum number of pieces or units ordered. In short, all these conditions must be met before buyers can place an order.
Complex MOQs can be quite a challenging process for suppliers. To develop an accurate understanding of the costs associated with their order, they must take into account numerous labor and administrative expenses in addition to each individual component piece.
Why Do Suppliers Set A Minimum Order Quantity (MOQ)?
Suppliers set a Minimum Order Quantity (MOQ) to protect their businesses from economic loss when fulfilling an order. This could be in the form of costly materials and machinery, or even something as seemingly small as bookkeeping fees. By setting a MOQ, suppliers can ensure that they make at least some amount of profit out of each order.
Suppliers need to cover the costs associated with transportation, holding, handling, and administration when fulfilling an order. All these necessary costs are taken into account while setting a MOQ as they can add up quickly for smaller orders. The larger the order quantity, the more these costs are spread out over all units in the order.
In addition, suppliers want to make sure they are not wasting their resources on orders that are too small to be profitable. By setting an MOQ, suppliers can make sure that they don't dedicate too much time and resources to fulfill smaller orders. By doing so, they can focus on larger orders that will bring in more profit.
| Scenario 1 – Large MOQ | Scenario 2 – Small MOQ | Scenario 3 – No MOQ |
Batch size from supplier (units) | 10,000 | 10,000 | 10,000 |
MOQ offered to the customer | 1000 | 10 | 1 |
Number of boxes sold per pallet | 10 | 1000 | 10,000 |
Selling price (per unit) | $0.10 | $0.10 | $0.10 |
Sales Turnover | $1000.00 | $1000.00 | $1000.00 |
Cost Per Unit | $0.08 | $0.08 | $0.08 |
Total Cost From the Supplier | $800 | $800 | $800 |
Cost to breakdown the pallet & repackage (per box) | $0.20 | $0.20 | $0.20 |
Total Processing Costs | $2 | $200 | $2000 |
Cost of goods sold | $802.00 | $28,000.00 | $0.20 |
Gross Profit | $198.00 | $0.00 | -$1800.00 |
The supplier makes a healthy profit in scenario A. In contrast, the supplier doesn't make any profit in scenario B where customer order quantities are smaller.
If the supplier allowed customers to purchase in single units, as seen in scenario C, they would make a loss per transaction.
Understandably, selling products in small numbers doesn't make good business sense for the supplier and cuts into their margins- which is why they set minimum order quantities.
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What Factors Influence Minimum Order Quantities (MOQ)
When it comes to MOQs for suppliers, many factors come into play. Raw materials, order volume, market price, and shelf life all have an impact on the quantity of products a supplier is willing to accept an order.
Raw Materials: The materials needed to produce the items must be taken into account. Suppliers of products may encounter their own MOQs down their supply chain, just as wholesalers do when buying from suppliers. Factories that make the raw materials for the suppliers rarely store inventory, so it is important to consider the amount of polymer plastic and any other components that would be needed to make the product in bulk.
Order Volume: Finding that break-even point for when an order will start to be profitable is key for suppliers. Who they are selling to, whether it be small retailers or big box retail chains, can dictate their MOQs and pricing. If the supplier usually sells low-margin items, they need to set a high MOQ to break even.
Market Price: Market prices of the products play an important role in setting MOQs. Prices that are too low can mean a supplier won't make enough money on each sale and setting prices too high could mean losing potential buyers. Suppliers should be aware of what their competitors are charging and try to stay competitive.
Shelf Life: Shelf life should be taken into consideration, even for durable goods that don't spoil. Products can become obsolete or less desirable as new products are released, so setting the right MOQs is key in accounting for these factors. Perishable items should also have their shelf life taken into account to avoid unsellable products.
How Does Minimum Order Quantity (MOQ) Impact Your Inventory?
The Minimum Order Quantity (MOQ) policy is an important consideration when it comes to inventory management. It can have a big impact on both the seller and the buyer, so understanding how it works is essential for managing your inventory effectively.
For sellers, MOQ policies are used to determine the minimum amount of product needed to be produced and stored at any given time. This helps them manage production schedules and inventory levels, but can also raise costs if the MOQ is set too high.
For buyers, the minimum order quantity affects their ability to purchase goods in a cost-effective way. If a buyer needs less than the established MOQ, they will have to look for another supplier with a smaller MOQ or consider other inventory storage options.
Buyers need to think about warehousing space and potential savings by ordering in bulk. Ultimately, both sellers and buyers need to understand how the MOQ affects their inventory to make the best decisions for their business.
A supplier's high minimum order quantity may lead to them having to keep a large inventory on hand at all times. If they want to avoid this and instead use just-in-time inventory management, then longer lead times for orders might be necessary.
If you have more inventory, it will cost your business significantly in warehouse fees and working capital, though you would order less frequently and spend less overall on materials. Although there is a higher chance of products becoming outdated or out of style before selling, the risk of stockouts is lower.
Benefits Of Minimum Order Quantities
Benefits For The Supplier
For suppliers, setting a Minimum Order Quantity (MOQ) can provide numerous benefits. It allows them to better manage their production and inventory levels, reducing costs associated with unnecessary production and overstocking. Overproduction of items can add up quickly, as suppliers must cover the cost of materials, labor, and other associated expenses.
Additionally, having a MOQ in place encourages buyers to purchase in bulk and can provide an additional source of revenue.
Having a MOQ also helps suppliers optimize their production process by ensuring that they are producing the right amount of goods and reducing the likelihood of wasted resources. Additionally, it can be used as a tool to regulate prices and increase profit margins.
It is important to remember that MOQs can also be used to protect customers and ensure orders are fulfilled on time. By setting an appropriate minimum order quantity, suppliers can make sure that they always have enough stock on hand to meet customer demands. This helps reduce the risk of delays or cancellations due to a lack of inventory.
Benefits for Retailers
The Benefits Of Minimum Order Quantities (MOQs) for retailers are numerous. One of the main advantages is economies of scale: when ordering in bulk, retailers can generally get a better unit price than they would with smaller orders. This can result in increased profits, even if there are additional costs related to buying in larger quantities such as increased warehouse costs or having to sell items at a discount.
Another benefit of MOQs is that they can help retailers develop stronger relationships with suppliers. By understanding the relationship between the ideal order quantity and the supplier’s MOQ, retailers have an opportunity to negotiate possible compromises or solutions. For instance, they may be able to work out order splitting with other retailers to reduce the costs associated with higher MOQs. This can lead to more favorable terms, better stock availability, and greater flexibility in their supply chain.
Finally, it is generally easier for retailers to plan their inventory when they are familiar with the MOQ requirements of their suppliers. Having a clear understanding of how much they need to order allows them to make more accurate purchasing decisions and helps them to better manage their inventory. It also makes it easier for retailers to plan and anticipate any potential issues with stock availability or changes in demand. All of these benefits can help retailers achieve greater efficiency in their supply chain.
How To Calculate Minimum Order Quantity In 4 Steps
Minimum Order Quantity (MOQ) is an important concept for businesses to understand when ordering or producing inventory. MOQ helps manage production costs, minimize storage and handling expenses, and ensure quality control of items that are produced in bulk. Calculating MOQ can be done in four broad steps.
A. Calculate Demand
Anticipate how much demand there will be for your products. Knowing this number is critical in understanding how quickly your product sells and how much inventory you should keep on hand. Base your forecast on data points like product type, seasonal changes, and competition. Also consider other elements such as shipment times, lead time delays, freight transit duration, and warehouse receiving procedures.
B. Determine Your Storage or Holding Costs
The price you pay for storage depends on a number of factors, including the type of goods you're storing. Some products are more expensive to store than others, for example, those that need to be kept refrigerated. This is because they require additional energy costs. Non-perishable items that can be stored at room temperature relatively cheaply
There are a few reasons why it's more profitable to not keep inventory for too long: storage costs, product size and special needs (like energy usage), and time/labor costs associated with storing the inventory.
C. What's Your Break-Even Point
To determine your break-even point, you will need to find the minimum number of sales for which you would recover your original investment expense.
Any supplier wants to make a profit, but how many units does that require? They need to take into account all the costs associated with production and delivery like labor, setup charges, and so on. The break-even point is where products no longer incur a loss--determining this number is crucial for MOQ purposes.
D. Come up with your MOQ
After you have all the data, use it to determine minimum orders for each product and make a plan for how to execute that. If needed, employ bulk-buying discounts or other sweeteners to improve average order volume (AOV). Plus, try to keep good relations with clients and suppliers whenever possible.
Software Used To Determine MOQ
Many companies still use pen and paper or even basic spreadsheets to calculate their MOQ, but this is often insufficient. Market conditions are constantly changing, meaning that your costs could fluctuate and important details like order quantities can get lost without proper inventory management software.
With supply chain management software that is part of an overall ERP platform, you can get down to the nitty-gritty details of order quantities, profit margins, and other data. This information can be displayed plainly in easy-to-read visuals on a dashboard.
Utilizing inventory management software can help you calculate MOQs and track order information. The platforms usually have dashboards that show important details like costs, supply chain specifics, and other data. This can be beneficial for sales and management teams to get a better understanding of why MOQs are necessary and how they work with customers to meet minimum requirements for orders.
Seeing pertinent information quickly and easily not only allows you to calculate your ideal MOQ, but it can also be helpful for other team members in understanding crucial data points like profit margins and Key Performance Indicators.
How To Make Minimum Order Quantity Work For Your Business
The main reason businesses set a minimum order quantity is to ensure they are making profits, not losses. Remember, suppliers typically have a breakeven point where selling fewer products than that would result in them losing money. So it's commonplace for manufacturers or wholesalers to establish an MOQ as part of their business policy.
While it may be tough to get used to setting an MOQ at first, the rewards suppliers can receive from doing so make it worth going through the initial challenges. By having an MOQ, prospective buyers know what they need to order in advance. This also helps businesses focus on only those orders that will be profitable instead of spending time fulfilling a large number of small orders.
Given that this may come with challenges when suppliers focus on fulfilling larger orders, they can offer a more consistent and positive customer experience. Ideally, this would lead to repeat orders from other large clients as well as increased profits.
In addition to setting a minimum order quantity, suppliers may also offer discounts for orders of larger quantities. This can help buyers who are transitioning to working with MOQs or those who need to vary their approach when working with different suppliers.
Frequently Asked Questions
A. How Does One Set A Minimum Order Quantity?
How do you determine minimum order quantity? By examining the unit's gross profit margin in relation to your production costs as a whole. This takes into consideration both hard costs (i.e. materials) and soft costs (marketing, administrative expenses, etc.). You want to ensure that every sale is profitable, which is what the minimum order quantity will guarantee.
B. What If You Don’t Need Large Stock Quantities?
If you are a small business or startup and don't need large stock quantities, there are still ways to take advantage of supplier minimum order quantities. Try reaching out to suppliers who have lower MOQs or those that allow for smaller orders. Additionally, be sure to communicate with your supplier frequently to ensure that you maintain a positive relationship. If needed, employ bulk-buying discounts or other sweeteners to improve average order volume (AOV).
C. Should I Stick With A Supplier Who Offers The Lowest MOQ?
There are pros and cons to both sticking with a supplier who offers the lowest MOQ or switching to one who has a higher minimum order quantity. On one hand, it can be beneficial to stay with a supplier you're comfortable with and who already knows your business needs. This can help streamline the ordering process, as well as ensure that you're getting the best prices possible.
On the other hand, if you're not seeing the level of service or quality you desire from your current supplier, then it might be time to explore other options. By switching to a supplier that has a higher MOQ, you can benefit from better service levels and larger discounts. However, keep in mind that this transition may take some time and effort on your part. So do your research, consider all of your options and make the decision that is best for your business
D. What Is MOQ In The Supply Chain?
Minimum order quantity (MOQ) is the number of products or services that must be ordered from a supplier to qualify for discounted pricing. MOQs are common in the supply chain and are used by suppliers as a way to ensure they're making a profit on each sale. In addition to discounts, suppliers may also offer other benefits, such as faster turnaround times or reduced shipping costs, for orders that meet the MOQ requirement.
E. Give Me A Trusted Manufacturer That Offers MOQ
When it comes to finding a trusted supplier that offers MOQ, Diversitech Global is a great option. They have been providing high-quality tools products and services for over 20 years, and they have a team of experienced professionals that can help you determine the right MOQ for your business.
Additionally, Diversitech can provide you with recommendations on how to make the most of your MOQ with their services, such as bulk-buying discounts and reduced shipping costs. With Diversitech Global's Services, you can trust that your order will be handled efficiently and professionally.
Ready to discuss your minimum order quantities? Get in touch