Minimum Order Quantity: What is MOQ?
Businesses in the industry of eCommerce understand that their inventory is the strongest asset of the company: having enough to meet the demand of customers, but not too much that it remains unsold and eats up cash resources through depreciation and holding costs. This can often be limited by the minimum order quantity (MOQ).
When purchasing inventory – whether that be raw materials or finished goods – companies must perform a careful balancing act. You must find a manufacturer/supplier who sells the products you need at a price that is right for you, but also one that allows you to order the right amount of units for you – regardless of quantity. This is where the minimum order quantity becomes a crucial element.
In this article, we will discuss what MOQ is, the calculations to work out your MOQ, as well as the factors that influence suppliers to use and enforce MOQ.
What is MOQ?
Minimum order quantity refers to the lowest number of units a supplier/manufacturer allows to be purchased for an order to be accepted. If you have an eCommerce business, you should get familiar with MOQs as they are often used by manufacturers, suppliers and wholesalers to maintain profitability, where selling units fewer than the MOQ would not be greatly beneficial.
The minimum order quantity can vary between suppliers and the type of goods being purchased. Typically, there is a sliding scale of MOQ concerning the price of an individual product, where more expensive and boutique items have lower MOQs to ensure that such products are moved on to resellers.
Calculating MOQs: Minimum Order Quantity Formula in Four Steps
All suppliers and manufacturers will have their own, optimal MOQ amount. There isn’t a set-in-stone formula for calculating the MOQ across the industry; however, our simple to follow guide can help you work out the right minimum order quantity for your business.
Step 1: Determine the Demand
For eCommerce merchants, product demand forecasts will influence much of the decision-making process behind the purchasing of inventory. Collecting data on the demand for certain products can assist in determining following purchasing orders.
Minimum order quantities may be similar to the forecasted demand of a product, which is beneficial for you as the eCommerce reseller. When calculating the demand for a product and resupplying inventory, you may also wish to correct your timeline to be reflective of lead times, transit times, receipt & stocking times of your third-party logistics (3PL) partner, as well as other potential hangups and delays – this can help in planning a reorder of goods sooner than you initially estimated.
Here are a few tips:
- Conduct weekly sales forecast: daily, if possible. This can help you adjust production quantities in real-time
- Maintain consistent and constant conversation with suppliers
- Ensure that you have a good amount of safety stock for times when demand sustainably increases or periods of any large fluctuations in demand
Step 2: Be Sure to Calculate Your Break-Even Point (BEP)
To calculate your MOQ by yourself, you will need to work out your break-even point (BEP). This will often happen when your second direct-to-customer (DTC) is finalised through the recovery of your initial acquisition cost by collecting the customer’s payment.
When working out your BEP concerning the relationship with your supplier, you should consider the absolute lowest per-unit GBP/dollar amount that you would be willing to charge for a higher-order value.
Step 3: Be Aware of Your Holding Costs
Products differ, as do the costs involved in storing them. A key rule of thumb for any eCommerce business is to ensure that goods are not kept in the inventory for longer than necessary.
You should be aware that the inventory holding cost is the tangible cost of keeping your products in storage, and you must be aware of all variables relating to holding costs before you invest too much capital into an inventory of goods.
Step 4: Calculate the MOQ
Having worked out the steps above, you are now ready to calculate the MOQ. Here’s how to do it.
If your company experiences a consistently higher demand and have a median average lowest order quantity that sees your company return a profit, you may wish to set your MOQ as than median average going forwards, so long as you remain profitable in light of the price of raw materials.
To demonstrate how this works, let’s say that your demand is stable overall with your customers purchasing on average 350 units per order but to make a profit, you need to sell at least 280 units per order.
Based on your sales data so far, you could set your MOQ to be anywhere between 280-350 units to ensure you are always making a positive.
Why Is MOQ Important?
MOQs are important as they determine which partners suppliers are willing to do business with: limiting their partner options to those eCommerce businesses that can meet the minimum order quantity.
If you are an SME owner, you may be deterred from doing business with suppliers with higher MOQs due to the capital they have available to purchase goods/raw materials. You should always strive to find a supplier or manufacturer who can meet your specific needs based on the demand you have.
Why Do Suppliers Use MOQs?
It may sound silly that suppliers and manufacturers will purposely limit their pool of partners and turn away business; however, they set MOQs so that they can make a profit relative to the costs it takes to produce a production run of goods. Should a supplier produce fewer units of a product than their established MOQ, they may not even be able to recoup the costs of the production run, never mind turn a profit.
Suppliers also set minimum order quantities due to limitations with regards to the minimum amount of units they can produce during a singular production run. It is typically not beneficial for a manufacturer to produce one item at a time, and they will usually make goods in bulk – even if in a number as small as 10. As a result, they will set a MOQ that reflects a level where they can make a profit and is worth it for them to start a production run.
How Suppliers Set Their MOQ?
Suppliers and manufacturers will often consider two factors when setting their minimum order quantities:
The Price of Raw Materials
As suppliers have their own supply chain intricacies to deal with – including the MOQs of their suppliers – this will be passed on to their customers through setting up a MOQ.
The type of product and its availability will be reflected in the price for the supplier, and once they wrap up a production run of their product, the minimum order quantity will be calculated with consideration to the price of the raw materials, as well as the product’s shelf-length and obsolescence.
Order Volume
As order volume is crucial to the success of a supplier/manufacturer, the creation of a MOQ should be done so with consideration given to the break-even point.
Suppliers should also be aware of their client portfolio, as minimum order quantities should be set with an awareness of the size of their customers: large retail chains are much more likely to accept considerable MOQs as opposed to smaller retailers.
The Advantages of MOQs
There are several benefits for both suppliers and buyers when minimum order quantities are set:
Advantages for Manufacturers/Suppliers
- Improved profit margins: by using MOQs efficiently, suppliers have more control over their profit margins as goods are only manufactured when decent profits can be made
- Better cash flow: cash flow can be more predictable for suppliers when product prices and order sizes are well aligned
- Reduce inventory costs: MOQs can sometimes reduce inventory costs as orders can be made when a buyer is ready to make a purchase, as opposed to searching for buyers after a production run
Advantages for Buyers
- Better buyer/supplier relationships: where the buyer’s economic order quantity (EOQ) is lower than the set MOQ, this can sometimes create a situation where both parties negotiate a deal with benefits for both sides
- Bulk savings: when suppliers have a set minimum order quantity, buyers can often be confident they are getting the best price per unit. Bulk savings can realistically mean increased profit for the buyer if the saving is significant enough. When suppliers/manufacturers give a bulk discount as part of a MOQ, they do so to guarantee sales or to increase the efficiency of their inventory turnover
Disadvantages of Using MOQs
Working with set minimum order quantities has its disadvantages to consider, as well. For example, buyers may be disinterested in purchasing to set MOQs as the upfront cost of a production run can be significant, even when savings are offered for a bulk purchase.
New businesses may not have the liquid cash available to fund a production run that has a minimum order quantity attached to it. Even if selling every unit of the MOQ eventually yielded a profit, the upfront cost required may never be able to be met.
As a result of MOQs being a deterrent for smaller businesses, this can have a knock-on effect on those suppliers who blanket-refuse partnerships based on the minimum order quantity. A thing to keep in mind is that a new company may not be able to commit to an MOQ to start with but if it demonstrates a strong marketplace potential, it could grow significantly in a short time, so it may be worth considering such partnerships.
FAQ
What is the minimum order quantity (MOQ)?
Minimum order quantity represents the smallest order a supplier/manufacturer/wholesaler is willing to fulfil.
How can I set a minimum order quantity?
You should begin by looking at the gross profit margin per unit sold in comparison to the overall production costs. It is crucial to include the hard costs for stuff such as materials and soft costs (for marketing and admin). Your MOQ should make sure that every order is profitable.
How can I work out a minimum order cost?
Work out your sales volume, overheads and profit per unit when establishing a beneficial MOQ.
How does MOQ relate to the overall supply chain?
There will commonly be several MOQs within a single supply chain. If you are an eCommerce business that purchases goods against a set MOQ from your supplier, consider that they, too, may be subject to various MOQs from their own suppliers.
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