Companies rely on minimum order quantity (MOQ) to maintain and increase profits when they face problems selling products with low manufacturing and selling cost. Take the example of connectors, that is a tiny part used in various electronic devices and can't be sold as a single unit. When it comes to these types of products, MOQ is helpful.
If you don't know what MOQ is and how you can use this method to grow your business, we got you covered. We have included the definition, benefits, implementation process, and more to help you increase your sales through proper sales and inventory management.
What Is Minimum Order Quantity (MOQ)?
Minimum Order Quantity is a specific number of products that a buyer buys from the supplier in one order. Stock distributor or supplier sets a MOQ for the product that they sell with less profit to cut down the misuse of the resources used on these low-margin orders.
MOQ is also set on the product by the suppliers to increase the profitability and scalability of the product. If a product has MOQ, then customers have to buy the same according to the minimum order quantity, and if the organizer does not buy according to the marked MOQ product, then the supplier will not sell the product to the customer.
For example, if a supplier sells mobile accessories and the MOQ of the earphone is 100, then you will have to buy a minimum of 100 units of mobile earphones in one order. You will not be able to buy a smaller quantity of mobile earphones than the MOQ decided by the supplier.
Importance of MOQ for Manufacturers, Suppliers, and Distributors
If a supplier follows the MOQ in their product, then they will not sell a less number of products than the decided MOQ. The item whose cost is more has a lower minimum order quantity and the product that is economical has a higher minimum order quantity. Manufacturers, suppliers, and wholesalers follow the MOQ for their products when it is tough to achieve a good profit by selling a single unit of the product.
When the MOQ is high, the supplier or manufacturer may be able to offer a lower per-unit price since they can spread their fixed costs over a larger order. This can be advantageous for the customer if they need a large quantity of the product and are willing to place a larger order to get a better price.
How Does Minimum Order Quantity (MOQ) Affect Inventory?
Minimum Order Quantity helps business owners to keep their inventory healthy. Inventory stocks depend on the MOQ of the product decided by the supplier or distributors. It keeps inventory stock updated that avoids out-of-stock situations. Let's take a deeper look at the types of MOQ and how they affect the inventory of the businesses.
MOQ is of two types, and suppliers set minimum order quantity for their product depending on the profit, purchase order, and space of their warehouse. Depending on the type and size of the business, the organization chooses the method to increase its business.
High MOQ
The products which have low-profit margins, less customer demand, and require large space of inventory usually have a high minimum order quantity. High MOQ products consume a large space of inventory but don't allow them to go out of stock. It helps in maintaining a high inventory level and is best for low-margined products.
It may increase your capital and lowers the frequency of your purchase order. The administrative cost is also decreased and increases operational inventory cost. Having a high MOQ can be one of the reasons why the product goes out of date, as it provides more options to buy products in bulk and at lower prices.
Low MOQ
The products which have a high-profit margin and more customer demand come with called low minimum order quantity. Low MOQ lowers the inventory maintenance cost as you don't require a large space to store the product.
It increases the risk of not having the goods in stock, and when you go through high demand, there is a great chance of losing sales and brand value of the company. The administrative cost of the product goes high when a product has a low MOQ.
Benefits of Minimum Order Quantity For Businesses
After knowing what is the minimum order quantity and how it affects the inventory, let us see the benefits of MOQ for businesses and suppliers so that you can use the MOQ in your business to scale up your profitability.
Ensuring profitability for suppliers
Setting MOQ for the product helps suppliers to maximize their profitability. MOQ helps suppliers to get an idea about the customer demands, and according to that, they can get an overview of their purchase order of the business.
Building relationships with suppliers
Buying a product of high MOQ will help you to build a good relationship with suppliers or distributors. However, low MOQ increases the frequency of the purchase order, so frequent buying from the suppliers can be one of the reasons for building a relationship with distributors. The reason is frequent buying from them will convey the message that you are a regular customer of their business.
Streamlining the ordering process
MOQ of the product will help you to know about the customer demand, will help to manage your inventory level, and never let inventory go out of stock. That will help you fulfill the customer demand at a time; thus, minimum order quantity streamlines your ordering process.
Reducing transaction costs
Buying the product in bulk quantity can cut your transition cost evolved in purchasing and selling the product. It cuts down on the operational and logistics costs of the stock. When anyone buys a product that has MOQ, the product goes low when the order of the product is high; thus, MOQ reduces transaction costs.
Encouraging bulk buying
MOQ encourages bulk buying because buying the product in bulk lowers the purchasing cost, logistics cost, and other administrative costs evolved in your purchase order and never lets your inventory go out of stock. In addition to this, buying in bulk will enable you to get offers and discounts.
Improving inventory management
Minimum order quantity helps you to know the customer demand, and after knowing the customer demand, it makes it easy to forecast which product you need the most in your inventory. It also gives you an idea about the product that customers do not like. MOQ gives an exact idea about the space you will need to store the product in the inventory. It also helps you to know the inventory turnover. Thereby, MOQ improves inventory management.
Drawbacks of Minimum Order Quantity for Businesses (MOQ)
Limiting cash flow
Minimum order quantity limits your cash flow as you are not able to sell a single unit of the product to the customer, and also, buyers are not able to perform the purchase order of the product against the MOQ. These limitations don't allow buying or selling your product in retail, so it limits the cash flow of the business.
Risk of stockpiling inventory
Performing purchase orders the businesses without knowing the customer's needs and demand can lead to the risk of stockpiling inventory. The reason is when buying high MOQ products, they can go out of date and also increase the storing and logistics costs.
Impact on smaller businesses
Due to high and low MOQ, small SMEs and entrepreneurs are not able to perform purchase orders with freedom. It does not allow small entrepreneurs to buy the product for less than the MOQ of the product because it requires high capital investment and a large warehouse to store the products.
Difficulty in predicting customer demand
The demand for minimum order quantity for a single unit makes it difficult to sell in bulk as no one wants to purchase it.
Creating challenges for custom orders or unique products
MOQ directly impacts the production of custom goods that are specially ordered because the raw materials are available in bulk. So, fabrication of such goods becomes quite difficult, and even though, if it is fabricated, then input cost will be higher, which will affect the customer.
Difficulty in testing new products
At the time of producing a new product, a sample is created, and considering its success, bulk production takes place. So, while producing or testing a new product, the MOQ becomes a hurdle because manufacturers fail to get the raw materials as they are present in bulk. On the off chance that the manufacturer goes with MOQ and the final product fails, then there will be a heavy loss of the purchased raw materials.
Types of MOQ
Minimum orders Quantity are classified into two types, i.e., Simple and Complex MOQ. Let us go through to learn what are the Simple MOQ and Complex MOQ of the product.
Simple MOQ
In a simple minimum order quantity, the buyer has to agree on the minimum quantity or the minimum spend before placing the order with the distributor. For example, if you have to buy a pen from a supplier, then the MOQ of the pen will be the quantity of the pen or the minimum spend that you will have to do to buy the pen. In simple MOQ, there will be only one factor that you will have to look at before buying.
Complex MOQ
Complex MOQ includes many factors, and you must look at two or more factors before ordering the product. It can be the minimum quantity of the product as well as the minimum order value, or it may be more complex than that. You have to fulfill these requirements at the time of purchasing the goods, and if you are not able to satisfy the requirement of minimum order quantity, then the company will not process your order.
Factors Affecting the Minimum Order Quantity (MOQ)
In this section, we will go through the different factors that affect the Minimum order Quantity.
Raw Materials
The manufacturer of the product has to deal with the MOQ of the raw material, so when a supplier or manufacturer decides the minimum order quantity of the product, its price and availability of the raw material play an important role in deciding the MOQ value of the product.
Production Costs
Before deciding the MOQ of the product, the supplier has to see the production cost involved in making the product.
Packaging Requirements
Packing cost and requirements are yet another factor affecting the product's minimum order quantity. After production, when suppliers receive the order, he has to spend money on the packing of the product.
Shipping Considerations
When a supplier gets an order from a buyer, they have to ship the product to the buyer, and when they ship the product to the buyer, a shipping cost is involved. The MOQ is decided considering the shipping cost of the entire order, so shipping charges are also included when suppliers have to decide the minimum order quantity of the product.
Storage Capacity
The products that occupy more space have high MOQ, and the product that occupies less space has a low MOQ because suppliers have spent and waived the storage of the products until it gets delivered to the customer.
Order Volume
Suppliers have to pay attention to the order volume when they have to mark the product with MOQ. The minimum order quantity is directly proportional to the order volume that depends on the customer type.
Market Demand
Market demand is the last most important factor through which suppliers decide the minimum order quantity. If the market demand for the product is high, then the MOQ of the product will be low, and if the market demand for the product is low, then the supplier marks the higher value of the MOQ of the product to increase the sale of the product.
How to Calculate Minimum Order Quantity (MOQ)?
There is no minimum order quantity formula that can be used to calculate the accurate quantity. It depends on distinctive factors like demand, location, business type, business size, and more. We have listed some factors that can help you to form a minimum order quantity formula for your business that are explained below.
Estimate Demand
Forecasting demand goes hand in hand with MOQ, which means the higher the demand, the higher the MOQ will be, and vice versa. Seasonality, customer preference, and competition play a very important role in the demand for the product. The supplier's minimum order quantity should be close to your demand, not too high. Lead time, freight transit time, warehouse management, and other potential delays are some of the key factors that impact the MOQ calculation.
Calculate Holding Cost
Holding cost is the cost to store the inventory in e-commerce warehouses or fulfillment centers. The longer storage of products can increase expenses, and some products need more custom expenses to store. Thus it can be financially beneficial to ensure that you do not store the product for a long time, as it may increase your expenses. So, you can determine the inventory to be maintained within your budget while calculating your minimum order quantity levels. Also, consider the special need like a refrigerator to maintain the temperature of the specific product as it can help you in the accurate calculation.
Access the Break-Even Point
The break-even point is the situation where the suppliers hold the equilibrium state, i.e., total expenditure equals the total revenue. It usually happens when you recover the customer acquisition and the comeback of the customer through various sources. To ensure a better calculation, the MOQ should not be less than the break-point to face loss. Additionally, it should not be so high that it forces the buyer to purchase from other e-commerce sellers.
Optimize Your Minimum Order Quantity Levels
Optimize your MOQ level if you are getting a higher demand than the level you are gaining profit. If your partner purchases 200 unit orders on average and you gain profit by selling at least 150 units, then you can increase your level. Including this method in your formula for calculating MOQ can help you to push your profit and even offer a more accurate result.
Steps to Implement Minimum Order Quantity
After coming so far in understanding minimum order quantity, factors, benefits, and ways to calculate, it's time to implement your MOQ. Below are three steps to follow while implementing MOQ in your business.
Calculate the minimum order quantity
Find the minimum order quantity for each product by determining the demand, the capacity to hold the inventory, and determining the break-even point. You can use the above tips for better collusion or automate the procedure to make the calculation process fast and easily accessible.
Connect with existing customers
Connect with the existing customers to let them know about the MOQ in advance through convenient sources. Make them understand why the MOQ is being implemented to acquire the buyers that normally don't purchase to meet the MOQ. In addition, try to acquire new customers by expanding your business to more areas.
Enforce the MOQ
The minimum order quantity in inventory management only works if it is enforced on time. So, you must start a conversation with your sales representative and account manager so that they can understand the functionality of MOQ. This step will also help to identify the possible resources available and negotiate with the sales team to work on ways to gain profit.
Manage MOQ With the Best Inventory Management Software
Calculating MOQ can be done using paper and pen, but it becomes complex even in basic spreadsheets when it comes to managing large inventories. At this phase of time, business automation software with advanced ERP functionalities like TranZact can be very beneficial to manage the minimum order quantity. It helps in digging deep into details of order quantities, profit margins, and many other details.
TranZact provides detailed inventory reports with pricing inputs to help manage MOQ accurately. All the calculations are automated and cloud-based and are displayed on the dashboard with easy-to-understand visuals. One can view at a glance and determine the ideal MOQs making it a powerful tool for the team members to understand the key details!
FAQs on Minimum Order Quantity (MOQ)
1. How to set a minimum order quantity?
You can set a minimum order quantity by assessing the gross margin cost and comparing it to the overall production cost, which includes the cost of material, marketing, and administrative expenses.
2. How can I negotiate the MOQ with my supplier?
You can negotiate the MOQ with your supplier using the following steps:
- Try to negotiate with the lower minimum order requirement.
- Consider paying a slightly higher price per unit for the lower MOQs.
- Make sure you are both on the same page.
- Use standardized components rather than custom ones.
- Manage the supplier's invoice timely.
3. What is the difference between MOQ and MOC?
MOQ stands for Minimum Order Quantity and refers to the minimum number of goods that the buyer tends to buy from the supplier. While MOC stands for Management of Change meaning change in the company's policy related to the safety and security of the raw material, products, machinery, and workers.
4. What are the consequences of not meeting the MOQ?
If you avoid MOQ and purchase the raw materials in bulk and during that period, if the demand for the finished product drops, then you may face severe loss.
5. What is the difference between MOQ and MPQ?
The minimum order quantity (MOQ) is the number of orders placed by the buyer, and the minimum packaging quantity (MPQ) is the number of products contained in a single package.
