As business owners, purchasers, or operation managers, you’ve probably spent a bit of time searching for ways to optimize your operations. In doing so, you may have noticed these three letters strung together: Minimum Order Quantity (MOQ).
It sounds like a simple concept, but in this article, we will discuss how to optimize your operations to take advantage of MOQs whether you are a supplier, buyer, or retailer.
- What Is A Minimum Order Quantity (MOQ)?
- How Are MOQs Offered?
- The Advantages And Disadvantages You Should Know Before Committing To An MOQ
- Variables That Affect An MOQ
- 4 Steps To Calculate Minimum Order Quantity
- Tips To Optimize Your Profit Margin Based On MOQs
- MOQ: Frequently Asked Questions
- The final Words On MOQs
What Is A Minimum Order Quantity (MOQ)?
Simply put, a minimum order quantity (MOQ) is the smallest amount of stock that a supplier will sell. If you cannot purchase the minimum order quantity for a certain product, the supplier will not sell it to you.
Minimum order quantities are most often used by manufacturers, suppliers, or other B2B operations in the context of a single order to ensure that profit margins are met.
Smaller merchants that sell directly to customers typically don’t apply an MOQ as their profit margins are higher and they don’t need to sell in bulk to reach revenue targets.
How Are MOQs Offered?
MOQ is usually set either on quantity or order value by wholesale suppliers:
MOQ for order quantities: If the supplier sets their MOQ at 1,000 units, buyers must order a minimum number of 1,000 units of inventory at one time. The supplier will likely optimize their MOQ based on their overhead or shipping costs.
MOQ in order value: If the supplier has a MOQ requirement of $500, the buyer or retail partner must order at least $500 in merchandise in a single order. In this case, the supplier mqy have arrived at their MOQ value from any MOQs they had to commit to in receiving or manufacturing the product in the first place.
In some cases, suppliers will be flexible to change their MOQ in order to adapt to their customer’s requirements.
In addition, often when supply and retail partnerships are long-term, it is possible for the manufacturer to adjust production quantities to allow a lower minimum order quantity and maintain a similar profit margin.
There are no defined regulations for MOQs, and different suppliers and industries may have a customized MOQ.
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The Advantages And Disadvantages You Should Know Before Committing To An MOQ
Pros of a minimum order quantity for buyers
Profit margin: As a buyer, finding suppliers with an MOQ leads to the cheapest rates per unit. Once a minimum order quantity is agreed upon, prices can be reduced considerably as the supplier is setting the bar for cost-efficiency. This helpfully increases the profit margin per unit for the buyer.
Inventory forecasting and management: Buyers committing to an MOQ can carefully calculate how much inventory they will be receiving per order and base their sales targets on this rather than the other way around.
Cons of a minimum order quantity for buyers
Higher-order value: Small business owners and retailers may face challenges as a result of an MOQ because the MOQ implies a higher-order value. Buyers may be forced to order extra units in order to meet the MOQ. This would increase the initial cost (but likely reduce the dollar amount per unit overall).
Pros of a minimum order quantity for suppliers
Increase in cash flow: When product pricing and order volumes are managed correctly, an MOQ may benefit suppliers in maintaining a healthier, more consistent cash flow.
Inventory expenses are reduced: In some circumstances, minimum order quantities (MOQs) actually keep manufacturing costs in check as production runs can be efficiently calculated to meet and not exceed demand. This can reduce the need for warehouse space while also lowering materials costs.
Improved profit margins: By using MOQs effectively, suppliers can start regulating their profit margins, ensuring that items are only produced when there are worthwhile earnings behind the order.
Cons of a minimum order quantity for suppliers
An unattractive offer: Suppliers that have rigid restrictions in the MOQs that they can offer may find a reduction in demand. For example, a supplier that offers a higher MOQ of units than their competitors will find potential customers who are unable to afford the initial layout, or have warehousing challenges, and will shop elsewhere.
Variables That Affect An MOQ
The significant complexity of supply chain management necessitates having a clear strategy and frequent monitoring of weak supply connections. But what are the factors that introduce risk into calculating MOQ?
Costs can increase across the supply chain
An MOQ can rapidly become inefficient when operating costs increase from factors such as:
- increasing energy, fuel, shipping, and labor costs
- a significantly large number of global businesses enter the market
- new technology or new regulations become disruptive
- rising commodity prices
These risks can be offset by increasing MOQs or the minimum purchase amount.
Unsecure supplier or buyer relationships
If you do not have a harmonious connection with your partners or suppliers, it will be a significant disadvantage. Typically, it will be difficult to get the best deal while negotiating cost-cutting measures with suppliers.
Maintaining good relationships with partners help you to generate opportunities for supply chain development.
In response to fluctuation in the market, such as variable consumer expectations, political agendas, and global sourcing, big operational challenges can arise. If a supply chain is cut, it can be very expensive to find new suppliers, particularly for niche products.
That’s why you must always be prepared with a risk management strategy that reflects how your business will overcome supply interruptions over the course of operations. You can, for example, collaborate with a logistics software development business to help you manage these challenges more efficiently and with less work on your part. After all, logistics management is critical to the organization as a whole.
4 Steps To Calculate Minimum Order Quantity
Calculating MOQ is an essential part of inventory management, but it can be quite complicated. There is no one-size-fits-all figure when it comes to minimum order quantity.
MOQ calculation must be done on a case-by-case basis since it differs with every situation, industry, and organization.
While there is no such thing as a correct formula to calculate minimum order quantity, here are a few tips to help you get started.
1. Calculate demand vs supply:
First, determine the demand from your customers. Forecasting demand is critical in determining how quickly your product runs and how much you can stockpile. Make sales forecasts based on the kind of goods you sell, seasonal patterns, growth rate, and competition.
Then consider what could delay meeting this demand, such as shipping times, lead times, freight transit times, and warehouse reception.
2. Find the Break-Even point
To determine your minimum order quantity for maximum profit, you must first figure out what your break-even point is. This is where revenue meets costs.
When it comes to wholesale, think about the lowest per-unit value you’re willing to accept, even if the overall purchase order value is high. The value can’t be so low that your profit margins are next to nothing. When volume discounts are expected, the lowest per unit dollar amount must be enough to cover your other costs and not lead to unprofitable sales.
3. Understanding your holding costs
The true cost of storing all of your products is the inventory holding cost. It is something you should think about before making a large investment in inventory.
Certain products have higher storage costs due to their size, length of storage, and special inventory requirements. It can save you money by ensuring that such items are not kept in inventory for an extended period of time.
4. Coming up with your MOQ
After collecting all the data, set minimum order quantities (MOQs) for each product and come up with a plan for implementing it. Use bulk-buying discounts and other incentives to boost the average purchase volume (AOV).
Tips To Optimize Your Profit Margin Based On MOQs
Since you understand what a minimum order quantity is and how to calculate it. Let’s get to the good part. Here are tips to utilize your MOQ to have a mutually beneficial relationship with your supplier or your buyer.
Negotiate the best possible deal.
If you want to make MOQs work for you, you should start by negotiating an MOQ that both parties can accept. This means the MOQ must be cost-effective, optimize warehouse shelf space, and be able to meet low or high demand.
Follow their lead
In some cases, suppliers will set an RRP price (recommended retail price) that has been carefully calculated to offer you a reasonable profit margin and protect the position of the product in the market. In this case, the only way to increase profit margin is to increase order quantities to get wholesale discounts or cut costs in other areas not related to your supply chain.
Order from trusted suppliers
You should look for legitimate and well-known B2B marketplaces to help you discover sources from a wide range of suppliers, allowing you to conveniently compare pricing and offers to choose the one that perfectly suits your demands. The limitation with online markets is that you still need to research the suppliers you want to buy from, even if the marketplace approved them first.
Ordering direct from a supplier can have more benefits in cost-cutting and communication. Visiting the company’s website, and taking a peek at their service pages such as their warranty, company mission, and vision, and ‘About Us’ page can tell you a lot about the personality of your prospective business partner.
Beyond minimum order quantities
If you are ordering MOQs, you should consider carefully your breakeven point and inventory turnover rate. Therefore, whether you’re a buyer or a seller, there’s one tactic you should both use: scalable software for your cloud-based inventory management system.
Not only more affordable than old-school methods, it also provides methods to help you save time and increase the transparency of opportunities and challenges.
This will help you to know exactly how much you need to sell or buy in real-time, give accurate forecasts for future demand, and simplify stocktaking for streamlined efficiency.
Related Article: Why sourcing and manufacturing in Vietnam saves you money.
MOQ: Frequently Asked Questions
What is the relationship between Minimum Order Quantity and Supply Chain Management (SCM)?
Supply chain management (SCM) is a complex activity with several stakeholders and moving parts, whereas MOQs are just one method to control the costs of receiving and selling goods.
A data-driven approach to supply chain management gives visibility from start to finish and allows for tracking the transmission of data, services, and materials from sourcing through to manufacture and delivery to the buyer.
Other aspects that contribute to efficient supply chain management include solid vendor and supplier relationships, effective cost control, obtaining the proper logistical partners, and embracing new supply chain technology.
What is the difference between Standard Packing Quantity (SPQ) and MOQ?
The Standard Packing Quantity (SPQ) means the set number of pieces in which an individual product is packaged. Each product may have a different SPQ depending on its nature. For toothpicks, it may be 1000 per box, whereas a planter is one per box.
MOQ on the other hand is the minimum quantity or value of boxes that you can order.
For instance, if the MOQ/SPQ is set at 100/10, that means you can order a minimum of 100 pieces in increments of 10 pieces per unit.
What is the difference between the economic order quantity (EOQ) and the minimum order quantity (MOQ)?
The buyer’s economic order quantity (EOQ) is the appropriate quantity of inventory that an entity can hold without producing any inefficiencies such as increased holding costs, overhead costs, and waste. Once the MOQ exceeds the EOQ, buyers begin to lose money and squash profit margins.
One solution is to work together with your supplier to negotiate compromises or share the order with other buyers.
How does high and low MOQ impact inventory and gross profit margins?
Suppliers don’t require as much inventory on hand for orders with a low minimum order quantity. However, they may also have a large stock with a higher inventory turnover.
Low MOQs might put additional strain on a supplier’s sales force, who may need to increase their customer acquisition costs to find more demand. Because of the increased frequency of orders, administrative costs are also greater as the salesforce has to manage more clients to generate revenue.
Suppliers with a high minimum order quantity may need to keep a significant amount of inventory on hand to fulfill orders.
A large inventory takes up a lot of warehouse space. Yet, administrative expenses are lower since goods or raw materials may be bought less often, resulting in bulk savings. While there is less chance of stock depletion, there is a greater risk of things becoming outdated, particularly for merchandise such as electronics.
Suppliers may also offer longer lead times to meet demand if they prefer to have a low inventory and implement just-in-time inventory management.
What are the benefits of working with Vietnam Creative Design Manufacturing?
As a global planter manufacturer, we have the economies of scale to offer mutually beneficial MOQs and deliver to any corner of the globe through our well developed logistic partnerships.
Learn why sourcing Vietnam Planters from Creative Design Manufacturing is the right move for your business.
The final Words On MOQs
Minimum order numbers can provide considerable benefits to both suppliers and customers. When managed effectively, the MOQ may be a significant inventory control mechanism, lowering costs for buyers and keeping profit margins in the black for suppliers.
Starting a business has several problems, one of which is finding the correct suppliers with whom you can freely discuss your inventory challenges.
Contact one of our sales professionals now to see how we can support you.