Every business owner would want to seize any available business opportunities. Who would want to deny service to a customer? But in actuality, not every transaction you enter into is advantageous for your company. The MOQ is one thing you should be aware of in business.
What is MOQ in manufacturing? Some manufacturers and wholesalers may have a minimum order quantity (MOQ) that must be met before placing an order. If a customer is unwilling or unable to place the required minimum order quantity, manufacturers, suppliers, and wholesalers may at times refuse their business.
Why do MOQs tend to be so high? The MOQ will typically increase in proportion to the number of resources required to produce the part. The volume of an order must be higher for a manufacturer to find a product worth their resources.
Continue reading for all the information you require about MOQ.
What Is MOQ?
Minimum Order Quantity is known as MOQ. The least amount of units that must be purchased at once is a minimum order quantity. Either cost or number of units is used to determine MOQ. Manufacturers or suppliers frequently use this technical phrase for a production run. It aids online merchants in determining the smallest quantity of merchandise they are willing to produce or supply in a single order.
Examples of MOQ:
- MOQ for manufacturers: A manufacturer’s MOQ of 1,000 units means that customers must order at least that many inventory items at once.
- MOQ for wholesale or retail partnerships: if a brand has an In order to meet the MOQ requirement, the wholesale or retail partner must order at least 50 units, or $500, worth of product.
In some circumstances, suppliers are adaptable and will alter the MOQ. There may be discussions about changing the MOQ in cases of long-term partnerships between suppliers and retailers.
There aren’t any set guidelines for MOQs or a universal MOQ; instead, every supplier and business type may have a unique setup.
2 Types Of MOQs
The minimum order quantities (MOQs) suppliers must meet to fulfill an order are a reflection of their financial limitations. Materials, equipment, and other expenses related to fulfilling the order, such as shipping costs, can be included. Administrative restrictions like bookkeeping and billing are another type of restriction.
Simple MOQs are usually defined as MOQs with one lower limit — either in a dollar amount or in a number of units, sometimes called “eaches”. Complex MOQs have multiple restrictions and may include minimum quantities of components or materials, money amounts, or finished goods.
- Simple MOQ Many businesses that aren’t retailers deal at least simply with a MOQ. This indicates that there is only one order restraint. A minimum spends or minimum quantity ordered could be the lower limit. A minimum order may be necessary, for instance, when printing books. Most printers would simply be unable to make a profit by setting up their presses, ordering printing plates, and carrying out a full print run for a small number of books. In order to make the print run profitable, they’ll probably demand a minimum order quantity.
- Complex MOQ Complex MOQs have two or more order requirements rather than just one, which makes them more difficult to deal with. A clothing manufacturer would make a good example. It’s more complicated for customers to order products than just a simple minimum quantity. In most cases, there are also additional restrictions, such as minimum requirements for the number of pieces or units, the minimum dollar amount, and the minimum length of fabric per color and fabric type used. All of these prerequisites must be satisfied for customers to place an order.
Setting up complicated MOQs for suppliers is not always easy, as the name suggests, and complex calculations are involved. Suppliers must comprehend the precise costs associated with each component part as well as the labor and overhead expenses related to the order.
Why Do Suppliers Have MOQs?
In order to support their production plans, suppliers frequently set MOQ. By establishing a minimum order quantity (MOQ), a supplier can ensure that the product will be run at a cost that will yield the required minimum profit.
Most of the time, suppliers specify a MOQ with all accounting completed in advance. The MOQ specifies the minimum quantity of units that must be sold in order for the supplier to break even. Without MOQ, the vendor might end up selling fewer units, which would result in financial loss.
A few manufacturers, especially those in China, operate at extremely low-profit margins. For large-volume orders, Chinese producers typically close deals at profit margins of 3 or 4%.
Based on how much they can produce in a single production run, factory size is another factor used to determine MOQs. When an item is too inexpensive to be sold in a single unit, a MOQ must be established.
How Does Inventory Be Affected By MOQ?
Both the seller’s and the buyer’s inventory is significantly impacted by minimum order quantities. The minimum order quantity (MOQ) has an impact on how sellers manage inventory because high MOQ sellers must produce and possibly warehouse large quantities. On the other hand, buyers must determine whether they will require at least the MOQ of a product, failing which they will need to find another supplier with a lower MOQ or look into inventory storage options. Buyers must take into account factors like storage space requirements and potential cost savings from placing bulk orders.
High Minimum Order Quantity
A significant amount of inventory may need to be kept on hand by suppliers to fulfill orders when the minimum order quantity is high. Order fulfillment may require longer lead times from suppliers if they want to maintain low inventories and use just-in-time inventory management. Increased inventory needs to occupy more warehouse space and tie up a significant amount of working capital. However, they reduce administrative costs because orders for goods or raw materials can be placed less frequently, which can lead to significant cost savings from a variety of materials and component parts further along the supply chain. And while stockouts are less likely, there is a higher chance that products will become outdated, particularly for things like electronics.
Low Minimum Order Quantity
Suppliers don’t need as much inventory on hand for orders when there is a low minimum order quantity because the average order size will probably be smaller. Less inventory may be kept on hand, but there may be more inventory turnover. Low MOQs can put additional strain on your sales team, who may need to handle more customers and exert more effort to generate leads. As a result of more orders, administrative expenses have increased. Additionally, suppliers with low MOQs reduce their risk of obsolescence even though they run the risk of running out of stock.
Can Minimum Order Quantity Change?
In general, MOQs are intended to assist suppliers in achieving their minimum profits. Depending on the clients, suppliers may be tolerant when it comes to changing the MOQs. When you develop a relationship with a business and engage in meaningful conversations, you might be regarded as a special client with the potential to help both parties succeed.
Sending the supplier an email is required in order to meet MOQs. You can find out how to do it and get their most recent rates by reading the information below.
To engage in a more in-depth discussion with the supplier and help them understand your needs, have your quantity requirements written down.
MOQs are not utilized everywhere, as was previously mentioned. From one supplier to another, their prices change. By looking for suppliers on different search engines, you can increase your options and find one with a more favorable MOQ. Some vendors have MOQ requirements of hundreds or even thousands.
Due to the market’s diversity, you must put forth the effort necessary to identify a supplier who can provide you with the quantity of goods you need at a cost that is both reasonable and appropriate.
Benefits Of Minimum Order Quantity (MOQ)
Minimum order quantities can provide both suppliers and buyers with a number of important advantages. The MOQ can be a crucial inventory control tool when properly implemented, helping suppliers maintain positive profit margins while also lowering costs for buyers.
Benefits For Buyers
- Economies of scale (bulk savings): When working with suppliers who have MOQs, buyers frequently know they are getting the best price per unit. Even with higher warehouse costs or having to sell items at a loss to increase inventory turnover, buying in bulk can occasionally result in buyers making more money.
- Improved relationships with suppliers: Having a good working relationship with a supplier of goods and raw materials is crucial. It can be difficult to strike the right balance between knowing the buyer’s economic order quantity (EOQ), also known as the ideal quantity of inventory, and the MOQ. Additionally, when the MOQ exceeds the EOQ, buyers and suppliers may occasionally work together to discuss potential concessions or solutions, like order splitting with other buyers.
Benefits For Suppliers
- Improved cash flow: An MOQ can support suppliers’ healthier, more reliable cash flow when product prices and order sizes are properly managed.
- Lowered inventory costs: In some circumstances, MOQs can limit the cost of inventory. Some orders are only produced when there is a buyer prepared to purchase an amount that will be profitable for the supplier, as opposed to creating an order large enough to make a profit and then looking for many small buyers. By doing so, you might need less warehouse space and spend less on inventory.
- Better profit margins: Suppliers can more effectively manage their profit margins by carefully utilizing MOQs, ensuring that goods are only produced when there are substantial profits supporting the order.
How To Drive Profitability With MOQ?
Why would a company impose a minimum order quantity that might drive away some potential clients? Profitability is the key factor. Sales that cost the company money shouldn’t be conducted. Therefore, having a minimum order quantity (MOQ) can be a wise business decision if suppliers have a threshold quantity of a particular product where it is profitable.
When establishing an MOQ for the first time, the adjustment period might be difficult. But the benefits suppliers stand to gain may outweigh the growing pains. The MOQ clarifies expectations for potential customers. And it can change the entire business culture to concentrate only on the profitable orders for the business rather than concentrating on completing numerous small orders. Again, there may be difficulties, but suppliers who focus on completing big orders can provide a more reliable and satisfying customer experience, which should encourage repeat business, referrals of other big-order clients, and profit growth. To ease the transition to working with MOQs or to change how they interact with buyers, suppliers may also decide to have a range of price points with discounts for larger orders.
Factors That Influence A Product’s MOQ
The Size Of The Bill Of Materials (BOM)
There may be hundreds of components on a product’s BOM, all of which must be ordered and shipped to the manufacturing facility. The manufacturer must spend time managing and organizing each of these parts. The MOQ is impacted by the time needed to evaluate each of these unique pieces.
The Effort To Assemble The Final Product
For each product, the component parts must be assembled to create the finished item. It takes advanced planning to set up an assembly line. This entails reserving floor space within the factory for the assembly procedure, educating workers and supervisors on the assembly procedures, and setting up machinery and equipment specifically for your product build. A higher MOQ can result from the complexity of your assembly line.
The Complexity Of Packaging The Device
There are two ways to package products. High-volume bulk packaging comes first. This type includes interior packaging like Styrofoam or anti-static trays and multiple units packed in a single, larger box. Retail packaging is the alternative. At this point, the item is placed in a lovely display box. On the shelf of their neighborhood retailer, it is what the final consumer will see. There are additional complexities that come into play within each of these packaging techniques, such as when a product has a number of SKUs, each of which has a unique retail packaging design. A higher MOQ may result from complex packaging.
The aforementioned elements all involve human capital and time resources, which in turn affects the MOQ that the manufacturer sets for producing your product. Although it is an option, negotiating for a lower MOQ may result in a higher price per unit.
For conversations about your product early in the design process, forge a relationship with your electronics manufacturer. A good manufacturer will highlight areas where your product design can be changed to cut costs and possibly lower your minimum order quantity. It will be simpler to make changes so that your MOQ and overall product costs are in line the earlier you discuss these issues.
The Amount Of Testing Required
Each unit is inspected to make sure your product is delivered to your end user at the caliber you anticipate. A product can be tested and examined in a number of ways. Visual inspection, testing of electrical integrated circuits, software testing, and testing against environmental elements like heat, abrasion, and water are some of these. The MOQ is influenced by the amount of testing required and any customized testing unique to your product.
How To Calculate Minimum Order Quantity?
Depending on the product and industry, determining the minimum order quantity can be challenging. And it probably won’t stay that way. Suppliers may need to alter prices and MOQs to remain profitable, especially if operating on low margins, as various component parts and raw materials change prices down the supply chain. The dynamic nature of MOQs can make it difficult for suppliers to stay on top of calculations, but inventory management software can help. It can be especially helpful to use software that is a part of a larger enterprise resource planning (ERP) platform. To help with even more precise and insightful information, ERP software combines data from various areas of your business into one digital ecosystem. So that suppliers can determine the best MOQs, supply chain management software is integrated with the finance management platform. This allows suppliers to have accurate, current information about raw materials and component parts.
Even for a straightforward MOQ, there is no standard formula for calculating MOQs. But here are some basic steps to consider when getting started making MOQ calculations:
- Consider demand: Analyze past data and project demand. If suppliers typically receive orders for 500 units or fewer, imposing an MOQ of 5,000 units overnight might not be possible. Seasonality and lead times, or how long it takes to produce an order, are other factors to be taken into account.
- Calculate holding costs: How much does a supplier pay to keep goods in storage? Depending on the particular item, this might change. Inventory management is made more challenging by factors like certain products needing to be kept in refrigerators or their potential odd shapes. Long-term inventory holding is never ideal, so MOQs must take these costs into consideration.
- Find the break-even point: Would a supplier make money if they sold 50 units for the going rate on the market? They’d have to figure out all the overhead costs like labor, setup fees, and other production and delivery costs, how about 500? In due course, they would discover the break-even point, which is crucial in figuring out MOQ.
- Set your MOQ: Set MOQs for each product after you’ve gathered all the data, and then come up with an implementation plan. Increase the average order volume (AOV) if required by offering discounts for large purchases and other rewards. In order to maintain relationships, work with customers whenever possible. Let’s take the case of a buyer who makes 550 unit purchases from a supplier every six months; however, the supplier wants to implement a 1,000-unit MOQ. The supplier could work with the buyer to place an order for 1,100 units at a discounted price and request payment in installments, a carrying fee to cover the supplier’s inventory costs, or storage of the goods because they will be used in the same year.
How To Implement Minimum Order Quantity?
Here are a few pointers to help you compile the data you need to perform the calculations and generate a unique MOQ for your company.
1. Calculate The Demand
Recognize how popular your products are. When estimating how quickly your product will sell out and how much you can stock up, demand forecasting is essential. Using information about the product, seasonal trends, and competition, make predictions. Be sure to account for the logistics as well, such as lead times, freight transit times, and warehouse receiving.
Having a figure to precisely predict inventory quantity enables you to adapt to changes in demand in the future and to assess sales forecasts for figure adjustment.
2. Determine Your Holding Costs
You can better understand the cost of storing goods by figuring out what your holding or carrying costs are. Some goods have higher shipping costs. As an illustration, some products need to be refrigerated, which results in energy costs, as opposed to products that can be stored on a warehouse shelf for months at room temperature.
Given the costs associated with storing inventory, it is always more profitable to hold inventory for a short period of time. Other elements include product size, unique requirements like energy consumption, storage time costs, and other labor and overhead expenses.
3. Determine Your Break-even Point
Determine your break-even point once you understand the concepts of demand and holding costs. How many products must you sell at a minimum to cover your costs?
Say you provided a customer with five products. How much revenue would that generate in comparison to the costs of keeping those products in stock, carrying costs, and overhead? How about if you ordered 200? In order to determine how sales revenue can outpace product costs, you must eventually determine a break-even point.
4. Draft Your Formula And Strategy
You can start developing the formula and implementation strategy after compiling all the data and deciding on a sound MOQ. This MOQ formula will outline each product type in your inventory, and the strategy outlines how your team can entice customers who place orders that are below the MOQ to increase their order sizes.
Having a formula and strategy in place, you can then prevent losing money on orders that are below the MOQs and reduce the chance of losing clients.
Giving an incentive like bulk-buying discounts can reduce the risk of losing money on sales as opposed to pushing to increase average order volume (AOV). It is less likely that customers will spend less than you are making by having a minimum purchase amount set to limit your risks. By offering them a worthwhile incentive, you can encourage your customers to make more purchases.
Read More: What Is FOB Price?
Frequently Asked Questions
How do you determine the minimum order quantity for a cost?
To choose the ideal MOQ, take into account sales volume, profit per unit, and overhead costs.
What does MOQ mean in the supply chain?
The minimum Order Quantity is referred to as MOQ. Numerous MOQs may be present in a supply chain. A supplier of a finished good might, for instance, has a minimum order quantity (such as a minimum quantity of printed books) that must be purchased. Even the supplier might encounter additional MOQs further along the supply chain, such as a minimum quantity of paper per order for the same book printer.
How to set a minimum order quantity?
Look at your gross profit margin per sold unit and compare it to your total production costs to determine the minimum order quantity. Both hard costs for things like materials and soft costs for things like marketing and administrative costs should be included in this. Every sale should be profitable, so your minimum order quantity should reflect this.
What is a minimum order?
The smallest order size that a company will accept is known as a minimum order. Each industry and supplier will have a different size.