Expense management

What is minimum order quantity(MOQ), and how does it work?

Apr 05, 2024

The minimum order quantity is the minimum number of items buyers must buy from a supplier. MOQs are established by suppliers to prevent wasting resources on orders that result in little or no profit. It can be based on the total order value or the number of units. This article will discuss minimum order quantity and its need and benefits.

What is the minimum order quantity (MOQ)?

To achieve cost-effective production and profit, many manufacturers impose a minimum order quantity (MOQ) to entice you to commit to purchasing sufficient quantities. The minimum order quantity is the minimum number of units a company wants to sell to a customer at once.

Although a merchant can establish MOQs for a variety of orders, it is typically used by a manufacturer or supplier in the context of a production run in e-commerce. For example, If a supplier has a minimum order quantity (MOQ) of 1,000 units, you can buy no less than 1,000 units at once.

Why do suppliers use MOQs?

MOQs allow suppliers to prevent the wastage of resources on products that offer little or no profit margin. They set a minimum order quantity due to the following benefits:

1. Enhanced cash flow

When determining minimum order quantities (MOQs), suppliers take into account their total cost of inventory in addition to any other costs they must pay to achieve the desired level of profit. At the point when this is overseen well, their income is better and more unsurprising.

2. Cost savings on inventory

Some suppliers don't even make products until a buyer meets their minimum order quantity. This prevents stock from entering their warehouse and reduces manufacturing and inventory expenses.

What are the benefits of the minimum order quantity (MOQ)?

Minimum order quantities can have several significant advantages for both buyers and suppliers:

1. Benefits to buyers and suppliers

1. Cost savings from inventory

If you calculate your demand and select the Minimum Order Quantity (MOQ) by it, you can avoid losing money by storing too much inventory for an extended time and increasing your holding costs.

2. Increased margins of profit

Suppliers benefit from the minimum order quantity (MOQ) because it guarantees a certain profit margin on all orders.

2. Benefits to the customer

1. Bulk savings, or economies of scale

When working with suppliers who have minimum order quantities (MOQs), buyers frequently have confidence that they are receiving the best price per unit. Even when warehouse costs rise or items must be sold at a discount to increase inventory turnover, buying in bulk can sometimes result in higher profits for buyers.

2. Enhanced connections with suppliers

The relationship between a product and raw material supplier is critical. Understanding the relationship between the MOQ and the buyer's economic order quantity (EOQ), also known as the ideal inventory quantity, can be tricky.

Do you really know the difference between wholesale and retail business? Check out our article on wholesale vs retail: key differences and get an clear idea of it.

How to calculate MOQ?

The Minimum Order Quantity (MOQ) cannot be calculated using a specific formula. Instead, it depends on a variety of different things, like demand, a company's size, location, industry, and more. This means that different e-commerce sellers can set different Minimum Order Quantities (MOQs).

Calculate demand

When determining the Minimum Order Quantity (MOQ), demand and inventory go simultaneously. The MOQ (Minimum Order Quantity) can rise in direct proportion to demand. Product type, season, competition, and customer preferences all influence product demand.

Cost of holding

The cost of storing inventory in an e-commerce warehouse or fulfillment center is referred to as the holding cost. The cost rises proportionally to the length of time that inventory is stored. As a result, short-term inventory storage is cost-effective.

Examine profitability point

When the total amount spent and the total amount earned are meet, the supplier has reached break-even. As a result, your Minimum Order Quantity (MOQ) should not be less than your break-point to avoid losses.

What are the types of MOQ?

Depending on the products they sell, your supplier will have different financial constraints associated with your orders. Several examples include costs for machinery, materials, shipping, bookkeeping, and billing. One constraint or multiple constraints will be limited in MOQs. There is typically only one lower limit for simple MOQs. On the other hand, complex MOQs have multiple restrictions. These may include minimum quantities of components.


Simple MOQ

Before placing an order with your supplier, you must agree on a minimum spend or quantity. A provider of personalized merchandise might be an excellent illustration of this. Adding a logo or color scheme to a mug or pen wouldn't be worth the effort if the buyer only wanted to purchase a few items.


Complex MOQ

When you want to buy from a supplier with a complex MOQ, there will be two or more requirements. You could need to meet a minimum order value and a minimum number of units. For instance, if you want to buy fabric for your clothing line, the supplier might ask for a minimum order quantity (MOQ) in yards or meters of fabric per color.

What are the factors that influence minimum order quantity MOQ?

The industry, type of product, and specific supplier all play a role in determining MOQ. However, the following are some typical influences on MOQ:

1. Cost of production

To cover their production costs, suppliers frequently impose minimum orders. Suppliers may find it economically unfeasible to produce smaller quantities as a result of higher unit costs associated with smaller production runs.

2. Scale economies

For larger order quantities, many suppliers provide discounts or lower unit prices. This is because economies of scale, in which fixed costs are spread across a greater number of units, reduce the cost per unit and frequently benefit larger production runs.

3. Production efficiency

A supplier's production procedures and efficiency may be disrupted by orders in smaller quantities. Suppliers benefit from optimizing their production line, lowering setup costs, and ensuring smooth operations by setting a minimum order quantity.

4. Management of the inventory

To avoid overstocking and meet demand, suppliers must manage their inventory levels. Suppliers can avoid overstocking on low-demand items and maintain a balanced inventory by setting a minimum order quantity.

5. Specialization or personalization

Suppliers may demand a higher minimum order quantity if a product requires customization or specialized manufacturing procedures. This is because customization frequently entails additional setup time and costs that are more manageable when distributed across larger order quantities.

Steps to implement minimum order quantity MOQ

Planning and careful consideration are required to implement a minimum order quantity (MOQ). To put MOQ into practice, follow these steps:

1. Choose your market and product

Learn about your product, its market, and the demand for it. To determine the appropriate MOQ, take into consideration things like production costs, economies of scale, customer preferences, and competition.

2. Examine Your expenses

Determine the costs of your production, including those for labor, overhead, raw materials, and any setup costs. Take into consideration the fixed expenses that can be spread out over a larger quantity to benefit from economies of scale.

Find the minimum quantity necessary to cover your expenses and guarantee profitability.

3. Set a realistic MOQ

Set a minimum order quantity that your company can afford based on your cost analysis. Think about how to strike a balance between meeting customer demand, cutting costs, and improving production efficiency. Make sure that the minimum order quantity is doable and appealing to potential buyers.

4. Communicate with providers

Discuss the MOQ requirements with your suppliers. Learn about their capacity, production capabilities, and any limitations they may have. In the interest of achieving a deal that is advantageous to both parties, negotiate the MOQ in light of your needs and their capabilities.

5. Determine discounts and prices

Set up pricing structures and any discounts that come with more orders. To encourage customers to meet or exceed the MOQ, think about providing incentives like volume discounts. Check to see that the prices are reasonable and competitive with those in the market.

Also read - What is procurement? meaning, types & process

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What is the difference between FOB and MOQ?

The supplier establishes MOQ to eliminate low-value orders that take time to fulfill. However, in logistics responsibility, the term "free on board" refers to situations in which the seller delivers the package on a ship and transfers the risk of transportation to the buyer.

What is the issue of MOQ?

MOQ frequently necessitates larger orders from buyers, which increases the initial investment. This can be tricky for private ventures, new companies, or purchasers with restricted monetary assets.

Why is MOQ important?

Orders of a certain minimum quantity serve as a cushion for profit margins. Suppliers will be able to determine if an order is worth the production costs with MOQs.

What does low minimum order quantity mean?

Suppliers won't need as much inventory to fulfill orders if there is a low minimum order quantity because the average order size is likely to be lower.

Why do companies have MOQ?

Because it determines which businesses a supplier is willing and able to do business with, MOQs are quite important. Suppliers can easily tell businesses how many units are needed for them to work together by setting MOQs.