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Minimum Order Quantity: Explained

Time to read: 6 minutes

To run a successful business, having the right amount of inventory is essential. While you must satisfy demand, you don’t want to keep goods you can’t sell. In an ideal scenario, you request reorders on a set schedule and in amounts you created to satisfy client needs. But making those purchases isn’t always that easy.

It’s enough of a challenge to find vendors who supply exactly what you need at a fair price. Many suppliers and manufacturers impose minimum order quantities (MOQs) to make a profit.

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Many manufacturers impose an Minimum Order Quantity to compel firms  to commit to purchasing enough to be profitable and cost-effective in production. This “coercion” is something we can easily observe in our daily lives. It’s why we usually buy eggs by the dozen and not individually. 

The minimum quantity requested from a wholesaler provider is the minimum order quantity. For instance, if your MOQ is 100 pieces or $100, your customers must buy at least 100 units or $100 to purchase something from you.

To maintain a steady cash flow and a healthy profit margin, it is advantageous to specify MOQs.

The various MOQs of your suppliers will significantly affect your inventory. They will affect your ability to keep stock, the frequency of orders, and the amount of warehouse space you have. You may need to consider alternative suppliers or pay a premium to buy less than the minimum order quantity if you can’t fulfill your supplier’s MOQ.

Suppliers typically employ Minimum Order Quantity for one reason: selling margin, or the revenue generated by selling goods or service.Suppose a supplier offers goods with a low markup or a narrow margin. In that case, it may require a significant amount of sales to break even after overhead and other ongoing expenses.

Different industries choose their MOQs for various reasons and in different ways. For  example, a manufacturing company starting a production run may incur high upfront expenses. It isn’t profitable until it sells enough units to cover those expenses.

How to Calculate Minimum Order Quantity

The process of determining the Minimum Order Quantity varies depending on the product and industry. It’s also a constantly changing and evolving factor. Suppliers may need to adjust prices and MOQs to stay profitable, particularly if goods have low margins. Various component parts and raw materials experience sudden price changes down the supply chain. 

The changing nature of MOQs can make it difficult for suppliers to maintain control over their computations. That’s where inventory management software can help. Enterprise resource planning (ERP) platforms include this useful software suite.

ERP software combines data from many business sectors into a single digital ecosystem for more precise and valuable information. For instance, a finance management platform and supply chain management software are integrated. These integrations allow suppliers to get accurate, current data on raw materials and component parts to determine the best MOQs.

Even for a straightforward Minimum Order Quantity, there is no standard formula for computing MOQs. But consider the following steps to determine your company’s correct minimum order quantity.

1. Understand Your Demand

Demand forecasting determines how many units you sell as a retailer by factoring in product type, competition, seasonality, and other elements. Your next purchase order may benefit from this information. Inventory forecasting is essential to balance supply and demand in this equation.

You might discover that the Minimum Order Quantity required by the manufacturer is very close to what you’ll sell. As you may find you need to order inventory sooner than expected, consider your overall timeline for getting  the stock ready to ship. Take note of lead times, freight transit times, warehouse receiving with your third-party logistics service provider (3PL), and other potential delays.

Analyze past data and potential demand. Suppliers often receive orders for 500 units or fewer units, so imposing a MOQ of 5,000 might not be possible immediately.  Seasonality and lead times are additional factors.

2. Calculate Holding Costs

The cost of storing some goods is higher than others (due to size, duration of storage, and special warehousing requirements). It’s financially advantageous not to retain these orders for long periods.

Before investing in inventory, you should consider your holding cost, which is the cost of keeping all your products in storage.

3. Know your Break-Even Point

After learning about demand and holding cost, you must next calculate your break-even point. How many products must you sell to make back the money you invested in them?

To illustrate, how much money would you make if you sold five items to a consumer vs. the cost of keeping those five products in stock? This includes carrying costs, overhead, and any additional costs. You will eventually reach a break-even point where the sales revenue outweighs the cost of the goods.

4. Set your Minimum Order Quantity

Establish MOQs for each product after collecting all the data, then develop an implementation plan. If required, employ discounts for purchasing in bulk and other rewards or incentives to raise the average purchase volume (AOV). Additionally, always maintain a good relationship with your clients whenever possible to encourage repeat purchases.

The Benefits of Setting a Minimum Order Quantity

Minimum order numbers can provide both suppliers and consumers with several significant advantages. When properly implemented, the MOQ can be a vital inventory control tool to reduce costs and maintain positive profit margins.

Benefits for Suppliers

A Minimum Order Quantity can provide a healthier, and more reliable cash flow when product prices and order volumes are adequately regulated.

In some circumstances, MOQs can control inventory costs. Some orders are only made when there is a buyer prepared to purchase an amount that will be profitable for the provider. This is a practical choice as opposed to creating an order large enough to earn a profit and then looking for many small purchasers. Doing so allows you to use less warehouse space and spend less on goods.

Suppliers can better regulate their profit margins by carefully managing MOQs. Doing this ensures that goods get produced when significant earnings support the order.

Benefits for Buyers

When working with suppliers with minimum order quantity, buyers frequently know they are obtaining an ideal price per unit. Even with higher warehouse costs or sellings at a loss to enhance inventory turnover, there are situations when buying in bulk can result in buyers making more money.

Due to minimum order requirements, ordering the amount you want can be challenging if it’s less than what the sellers are ready to accept.

Fortunately, there are solutions to avoid Minimum Order Quantities that are too high for your needs. Finding a vendor with a lower minimum order number is an option, as is attempting to work out a deal with your current vendor.

The Impact of Minimum Order Quantity

A supplier can regulate the number of goods removed from their inventory with each sale by establishing MOQs. Therefore, the chosen Minimum Order Quantity will inevitably impact on forecasting, inventory turnover, and overall inventory management.

High MOQs, for instance, will boost revenues and turnover rates. But it can also cause significant variations in the amount of inventory. A supplier may already have low stock levels after a few orders, making it challenging  to fulfill more on short notice.

Suppliers must reevaluate their supply chain and carry extra safety stock to meet increased MOQs . Doing this provides a buffer against these scenarios. It also necessitates more extensive facilities, personnel, and expensive maintenance.

Low MOQs won’t result in any drastic changes to your inventory. Additionally, a reduced MOQ will eliminate the need for more expensive upfront purchases, facilities, and utility expenditures. This works great if you find a supplier that can schedule their production to accomodate with fast replenishing inventories.

However, working with smaller amounts necessitates more labor, scheduling work, and higher shipping expenses.

Whatever MOQ you choose, it’s important to consider historical inventory turnover and broader market patterns. Estimate the quantity of merchandise you will need on hand to meet the demand for a specific time. Also, work out the lead time required to restock inventory.

All of these elements will aid in maximizing long-term profit and the efficiency of your company.

When creating a wholesale channel for your company, setting up MOQ terms is optional, but it just makes more sense from a business standpoint.

Dropping the Minimum Order Quantity restrictions for an initial order makes sense if you’re starting a new partnership with a new buyer. This will allow them to “test drive” your products risk-free and observe how quickly it moves off their shelves.

If your merchants are hesitant to do business with you because of your MOQ requirements, you can utilize this offer to persuade them.

In the end, there are no hard rules or regulations regarding MOQ and any other aspect of it. B2B eCommerce is not a one-size-fits-all endeavor, so you must scope out what works best for your company and its products.

ZhenHub helps your business determine its MOQ fast and easily. Manage important data and metrics through our logistics software platform. Access dashboards that allow you to understand expenses, supply chain movement, and other important logistics information. Find the best MOQ for your company today. Sign up at our website now.

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