What is MOQ (Minimum Order Quantity)?
What is MOQ? The minimum order quantity (MOQ) is the smallest order size suppliers will accept when you order goods from them. It can be expressed as a quantity, although some suppliers work with a minimum order value.
Determining the minimum order quantity for each product is an important part of the inventory planning process for the supplier or wholesaler. The aim is to minimize shortages and maximize profitability. Inventory consumes much of a business’s cash flow; MOQ aims to strike a balance between having enough to fulfill orders without tying up too much cash.
By setting minimum order quantities for its customers, a supplier or wholesaler sets parameters to make the orders worth their while. For one, the MOQ ensures the business is maximizing the amount it can ship at a given shipping rate, i.e. if shipping twenty of an item costs the same as shipping ten of that item due to the weight ranges on shipping price lists, the business can reduce cost of shipping for each unit by requiring twenty items be purchased at a time. This same principal can be applied to labor costs.
A supplier’s goal is to distribute product to distributors and retailers who will sell large quantities, rather than be concerned with selling individual items. Operating this way maximizes efficiency, and saves money on labor, storage, and shipping. Setting minimum order quantities helps the supplier achieve that goal. Without MOQ, suppliers and wholesalers are subject to operating according to the inventory levels that suit their customers, and their customers don’t want to hold any more inventory than is necessary.
How MOQ Underpins Profitability (and hopefully increases profitability)
Let’s invent a scenario to illustrate this point.
Every business has fixed costs, premises, salaries, insurances, etc. These are sometimes called establishment costs.
For the sake of this example, let’s assume establishment costs are fixed at $100k per month – not untypical for an SME. Let’s assume (for simple math) there are 20 working days in the month, and 10 hours each working day. So, the establishment costs run at $500 per hour – every hour.
Let’s further assume that we sell a product at a sale price of $50.
In our SME, when we receive an order, it takes us 1 hour to process the order, pick the goods, package, and ship.
So, if we accept an order for one item at $50, we are barely making a dent in the $500 establishment costs. Ignoring the cost of the product we are selling for a moment, we need a policy that says the Minimum Order Quantity (MOQ) for that item is at least 10, and probably significantly more.
The example serves to show that if you understand your fixed and variable costs, the product mix you are selling and the daily capacity you can ship, then calculating the MOQ is a mathematical model that should at least stop you from wasting money.
When determining the MOQ you also need to consider what the competition is doing. If customers turn to another business simply because they offer lower minimum quantities, all the other calculations go out the window. The business must strike a balance between profitability and market share. It may not be worthwhile lowering minimum order quantities for one or two customers, but if high thresholds turn a lot of customers away, you need to figure out how to make a lower quantity work for your company.
If you sell the same product as another company with lower minimum quantities, there are still ways to gain a competitive edge:
Seek out reviews from satisfied customers. Having a stellar reputation is a big plus.
Offer discounts for larger order quantities. Creating different discount amounts for large quantities or price tiers will also help you move more product.
Make an extra effort to meet customer inventory needs when a customer is in need.
Deliver great customer service.
Setting a MOQ is not the only way to drive higher profitability. Minimum spends and drop shipping offer alternative means to reach goals while offering flexibility to customers.
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