Having the right amount of inventory is vital to sustaining a business. You need to meet demand, but you don’t want to hold onto stock you can’t sell. In a perfect world, you would set up reorders on a schedule, and in quantities exactly designed to meet customer needs. Purchasing, however, isn’t always that simple.
It’s enough of a challenge to find suppliers who sell exactly what you need at a fair price. Many manufacturers and suppliers also set minimum order quantities (MOQs) to ensure they’re making a profit.
What is minimum order quantity (MOQ)?
Minimum order quantity is the smallest number of products that you must purchase in one order from a supplier. Suppliers set MOQs to avoid wasting resources on orders that deliver them little or no profit.MOQ can be based on the number of units or the total order value.
Here’s an example:You buy pens at $.20 each. Your supplier’s MOQ for pens is 1,000 units. This means you’ll have to spend a minimum of $200 on pens per order. Different types of products will require different MOQs; an item that costs a lot to produce is likely to have a lower MOQ than products that are easy and cheap to produce.
Difference between MOQ and EOQ
Understanding the differences between MOQ and EOQ (economic order quantity) is essential for making informed purchasing decisions. While MOQ is dictated by your supplier’s constraints, EOQ is determined by your business’s need to balance costs and meet customer demand efficiently.
It’s the ideal order size that minimizes the total cost of inventory. This includes costs such as ordering, holding, and shortage costs. Calculating EOQ helps you determine the most cost-effective quantity to order, balancing between ordering too much and facing high holding costs and ordering too little, leading to stockouts and potential lost sales.
By strategically managing these two metrics, you can optimize inventory levels, reduce costs, and maintain a smooth supply chain, ultimately contributing to the success and profitability of your retail business.
Why do suppliers use MOQ?
- Covering production costs and ensuring profitability. Suppliers set MOQs to ensure that each order covers their fixed production costs like labor, materials, and machinery setup, maintaining their profitability.
- Streamlining the production process. By producing larger, consistent quantities, suppliers optimize manufacturing efficiency, reduce waste, and manage resources more effectively.
- Enhancing quality control and speed. Higher, consistent production volumes allow for better quality control and quicker turnaround times, ensuring a reliable supply of goods for customers.
- Maintaining business viability. MOQs ensure that every order contributes positively to the supplier’s bottom line, making their business model sustainable.
- Creating mutually beneficial relationships. MOQs help suppliers build better relationships with factories and with business owners like you, thanks to consistent production processes, quality, and lead times.
Benefits of MOQs
Benefits for suppliers
- Better cash flow. When setting MOQs, suppliers take their total cost of inventory into account and pair it with any other expenses they have to pay before reaching the desired profit level. When this is managed well, their cash flow is healthier and more predictable.
- Reduced inventory costs. Some suppliers don’t even produce goods until a buyer who can meet their MOQ makes a purchase. This keeps stock out of their warehouse and reduces both inventory and manufacturing costs.
- Increased profit margins. As noted, supplier MOQs are usually set up in a way that ensures a certain profit margin. Often, they will only order new stock when their sales reach a level that creates an operating profit. This means that even a relatively low MOQ will offer the safety net they need.
Benefits for buyers
- Saving on bulk purchases. If you work with suppliers that have MOQs, you’ll know you’re getting the best price per unit. Buying products in bulk results in savings and more profit on each unit sold.
- Enhanced relationships with suppliers. Your ideal purchase quantity may differ from your supplier’s MOQ. This means you’ll need to work with your supplier to reach a solution. These negotiations can create stronger relationships.
Types of MOQs
Simple MOQ- As the name suggests, simple MOQs are easy to understand. You’ll need to agree on a minimum spend or minimum quantities before you place an order with your supplier.
A perfect example of this might be a supplier of personalized merchandise. It wouldn’t be worth the resources needed to add a logo or color scheme to a mug or a pen if the buyer was only looking to purchase a small number of items.
Complex MOQ- Two or more requirements will be in place when you’re looking to buy from a supplier with a complex MOQ. You might have to reach a minimum quantity of units as well as a minimum order value, and the requirements might be even more complex than that.
For example, let’s say you’re sourcing fabric for your clothing line; the supplier might require an MOQ in yards or meters of fabric per color. They will set up an MOQ that takes minimum spend, minimum quantities, and minimum measurements of fabrics into account. As the buyer, you’ll need to match all the conditions to be able to place an order.
How to calculate minimum order quantity
if you design and manufacture your own products for in-store or online sales, you might find yourself setting MOQs for wholesale orders to other retailers. It’s crucial to understand how MOQs are calculated, as they can vary significantly based on industry and product type. Factors like fluctuating raw material costs and component part prices mean that MOQs aren’t static. Suppliers gather extensive data to pinpoint the MOQ that maximizes profitability, considering various key parameters in their calculations. This knowledge can also help you anticipate and adapt to changes in your purchasing conditions.
- Determine demand
- Calculate holding costs
- Find the break-even point
- Set minimum order quantity
1. Determine demand- Demand will vary and be influenced by a variety of factors, including product type, competition, and seasonality. Suppliers review historical data to forecast demand and use it to define the inventory quantities needed to satisfy market fluctuations.
2. Calculate holding costs- Depending on the products sold and their storage requirements, the costs to store products (also known as inventory carrying costs) will vary. Refrigeration, for example, will incur energy costs, and odd-shaped items may take up extra space.
No matter the variations, suppliers will not want to store products for too long, as their finances will benefit from a quicker turnaround. This is worth remembering when you’re looking for deals.
3. Find the break-even point- Whether you want to set minimum order quantities for wholesale purchases of your products or understand when you’ve earned back customer-acquisition costs for direct-to-consumer orders, knowing your break-even point is key. This is when your product sales (or your supplier’s sales) are equal to business expenses.
When it comes to MOQs, suppliers consider how many items they need to sell before they can break even and eventually make a profit. Their costs generally include the price of materials or supplies as well as labor costs, storage costs, customer acquisition costs, and anything else directly connected to a sale.
4. Set minimum order quantity- Once suppliers determine demand, calculate holding costs, and find a break-even point, they set their MOQs for each product type. Having this in place weeds out customers who want to buy lower quantities, which leads to unprofitable orders.
To persuade their customers to buy in higher quantities, suppliers sometimes offer incentives like bulk-buying discounts. This helps their inventory management and your bottom line.
FAQs
How do you establish minimum order quantity?
- Take Inventory: Before you can determine a minimum order quantity, you need to know what your inventory levels are. Take a full inventory of the items you’re looking to order and determine how much you have in stock.
- Analyze Demand: After you know your inventory levels, analyze how much of the item you’re selling. Look at your sales data to get an idea of what the average demand is for the item and how often you need to replenish your stock.
- Set Reorder Point: Use the inventory and demand information to set a reorder point. This is the point at which you will need to replenish your stock.
- Calculate Lead Time: Lead time is the amount of time it takes for you to receive your order. Consider how long it typically takes for your supplier to deliver the item and factor in any additional time needed for processing or customization.
- Determine Minimum Order Quantity: Once you have all the information, you can determine the minimum order quantity. This is the lowest amount of the item you need to order to restock the item.
What is the formula to calculate MOQ?
MOQ (Minimum Order Quantity) is typically calculated by dividing the total cost of the order by the unit cost of the product. The formula for this is: MOQ = Total Cost of Order / Unit Cost of Product
What is the difference between EOQ and MOQ?
EOQ stands for Economic Order Quantity and is the quantity of an item that should be ordered to minimize ordering and holding costs. MOQ stands for Minimum Order Quantity and is the smallest number of items a supplier will accept for an order. EOQ is based on the cost of ordering and holding, while MOQ is based on the supplier’s requirements.
Practice area's of B K Goyal & Co LLP
Income Tax Return Filing | Income Tax Appeal | Income Tax Notice | GST Registration | GST Return Filing | FSSAI Registration | Company Registration | Company Audit | Company Annual Compliance | Income Tax Audit | Nidhi Company Registration| LLP Registration | Accounting in India | NGO Registration | NGO Audit | ESG | BRSR | Private Security Agency | Udyam Registration | Trademark Registration | Copyright Registration | Patent Registration | Import Export Code | Forensic Accounting and Fraud Detection | Section 8 Company | Foreign Company | 80G and 12A Certificate | FCRA Registration |DGGI Cases | Scrutiny Cases | Income Escapement Cases | Search & Seizure | CIT Appeal | ITAT Appeal | Auditors | Internal Audit | Financial Audit | Process Audit | IEC Code | CA Certification | Income Tax Penalty Notice u/s 271(1)(c) | Income Tax Notice u/s 142(1) | Income Tax Notice u/s 144 |Income Tax Notice u/s 148 | Income Tax Demand Notice | Psara License | FCRA Online
Company Registration Services in major cities of India
Company Registration in Jaipur | Company Registration in Delhi | Company Registration in Pune | Company Registration in Hyderabad | Company Registration in Bangalore | Company Registration in Chennai | Company Registration in Kolkata | Company Registration in Mumbai | Company Registration in India | Company Registration in Gurgaon | Company Registration in Noida | Company Registration in lucknow
Complete CA Services
RERA Services
Most read resources
tnreginet |rajssp | jharsewa | picme | pmkisan | webland | bonafide certificate | rent agreement format | tax audit applicability | 7/12 online maharasthra | kerala psc registration | antyodaya saral portal | appointment letter format | 115bac | section 41 of income tax act | GST Search Taxpayer | 194h | section 185 of companies act 2013 | caro 2020 | Challan 280 | itr intimation password | internal audit applicability | preliminiary expenses | mAadhar | e shram card | 194r | ec tamilnadu | 194a of income tax act | 80ddb | aaple sarkar portal | epf activation | scrap business | brsr | section 135 of companies act 2013 | depreciation on computer | section 186 of companies act 2013 | 80ttb | section 115bab | section 115ba | section 148 of income tax act | 80dd | 44ae of Income tax act | west bengal land registration | 194o of income tax act | 270a of income tax act | 80ccc | traces portal | 92e of income tax act | 142(1) of Income Tax Act | 80c of Income Tax Act | Directorate general of GST Intelligence | form 16 | section 164 of companies act | section 194a | section 138 of companies act 2013 | section 133 of companies act 2013