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What is Minimum Order Quantity (MOQ)

Minimum order quantity, or MOQ, is an important term in business. It’s what you need to calculate before you can make a purchase.
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What is Minimum Order Quantity (MOQ)?

Minimum Order Quantity (MOQ) is the small number of products you must purchase in one order from a supplier. MOQ are instituted so that the business producing or selling the units can not only cover their costs, but also ensure some profit from the production or sale.

Many manufacturers sell in bulk to wholesalers, who then sell in bulk to retailers using an MOQ. Then individuals can go to the store to buy just one or two of a product.

What is the impact of minimum order quantity on inventory?

Supplier MOQ, high and low, will have a major impact on your inventory. They will affect the number of days you hold stock, the frequency of your purchase orders, and the space available in your warehouse.

Low MOQ

Ordering products from a supplier with a low minimum order quantity means that you will have less stock on hand and you may need to restock more frequently, which may increase administration or transport costs.

There is also the risk of not having enough stock on hand when ordering small quantities of stock.

But a low MOQ reduces your working capital investment. This way of working also reduces the chances of inventory becoming obsolete or irrelevant over time.

High MOQ

If you work with a supplier that produces high volumes, you’ll need to order large amounts of inventory, which can require longer lead times.

Large amounts of inventory also take up more space and cost. In addition, you run the risk of holding your inventory for too long and having it become obsolete.

On the plus side, you’ll also have more opportunities to buy in bulk at lower prices, and the likelihood of running out of stock is reduced.

How to calculate your MOQ?

  • Determine demand– use analytics and your inventory software to forecast how many orders you normally ship, what is your seasonality like and have you got any big campaigns lined up that may affect order volumes?
  • Consider cost of space– you will need to consider how much space is needed to ensure items do not go out of stock, but without paying for wasted space.
  • Find the break-even point– quite simply, how many products do you need to sell in order to cover the costs from your supplier. It’s important to build good relationships with suppliers at a cost that works for you but also one that ensures a good long-term relationship to keep a consistent price.
  • Confirm your MOQ– after analysing order volumes and product performance, you will now have the information to determine your MOQ. If you have the capital and warehouse space available, using bulk-buying discounts is a great long term option for lower costs.

Benefits of MOQ

MOQ are not only beneficial in helping suppliers maintain healthy profit margins, but they can also help you improve inventory control and keep purchasing costs down.

Benefits to suppliers

Benefits to suppliers

  • Reduced inventory costs– Some suppliers don’t even produce goods until a buyer who can meet their MOQ requirements comes in and purchases them. As a result, suppliers don’t keep stock in their warehouses, which reduces inventory and production costs.
  • Increased profit margins– Suppliers’ MOQ are usually set in such a way as to ensure a certain profit margin.

Benefits to buyers

  • Lower Prices– The main benefit of MOQ is that they allow buyers to purchase products at lower prices.
  • Easier inventory management– When placing an order, a higher MOQ allows buyers to negotiate better prices and terms with suppliers. This means both getting a good deal and having plenty of inventory.

Conclusion

Minimum Order Quantity (MOQ) signifies the minimum number of units a customer must buy to complete an order.

It’s a common practice in retail that benefits both retailers and manufacturers. For retailers, MOQ aids in inventory management, reducing overstock risks, while for manufacturers or wholesalers, it aids in predicting product demand.

However, MOQs can restrict customer purchases and challenge smaller businesses in competing with larger ones in e-commerce.

To offset these challenges, e-commerce businesses can offer varied products with different MOQs, provide volume discounts, or collaborate with dropshipping suppliers or distributors.

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