A crucial component of any organization is the supply chain process. Slight here and there may badly affect your business’s success. Here, Minimum Order Quantity plays a vital role in the entire process.
Minimum Order Quantity is essential for the supply chain management. It is the bare minimum of stock that a company must buy from a supplier to avail of discounts or continue doing business with them.
According to Forbes, inventory is the second biggest cost for small businesses. So, it’s true that businesses that adopt efficient supply chain management techniques, like MOQ, can increase their profit margins by as much as 10–20%. This highlights the importance of MOQ in ensuring that a business’s supply chain is optimized for efficiency and cost-effectiveness.
So, if you are stuck at some point and don’t know how to start calculating Minimum Order Quantity (MOQ), this blog will answer all your queries.
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What is MOQ (Minimum Order Quantity)?
MOQ is the least amount of inventory that a seller will purchase from a supplier at one time. It plays a crucial role in supply chain management by determining the price and availability of products.
No specific amount is fixed for MOQ, as different businesses may have different requirements. For example, a brand or supplier may have an MOQ requirement that the seller will purchase depending on the unit number or total ordered value.
Additionally, suppliers may only manufacture specific products in large quantities. Here, the MOQ ensures maintaining an adequate inventory level to meet the demands of customers. The supplier sets this requirement to manage their production as well as distribution processes efficiently and cost-effectively.
Types of MOQ
MOQ is classified as Simple and Complex based on the type of business, clientele, and desired degree of flexibility. Going ahead, let us discover the differences between both MOQs types.
1. Simple MOQ:
- It is straightforward and less complex
- Easy to understand and implement
- Offers limited flexibility to customers
- Suitable for small businesses or one-time orders
- Does not change based on the customer volume and frequency of purchase
2. Complex MOQ:
- It is more intricate and offers more customization
- Difficult to understand and implement
- Offers more flexibility to customers
- Suitable for large businesses with frequent order or high order volume
- Changes based on the average order volume and frequency of purchase
Now that we know the difference between simplex and complex MOQ, let us find out how we calculate the minimum order quantity (MOQ).
Steps to Calculate Minimum Order Quantity: Explained
The complexity of calculating the minimum order quantity is not constant and varies by product and industry. Suppliers may need to adjust prices and MOQs to stay profitable, particularly if they work on low margins. This is because various components and raw materials experience price changes down the logistics.
There is no standard formula to calculate MOQ, even for a simple MOQ. But before you begin calculating MOQ, pay attention to these basic steps:
1. Forecast the demand
The first step to determining your MOQ is understanding the demand for products in your business. Demand will vary based on various factors, including product type, competition, seasonality, and customer preferences.
When calculating MOQ, inventory and demand go hand in hand; the higher the demand, the higher minimum order quantity (high MOQ) will be, and vice versa. Suppliers review historical sales data to forecast demand and use it to define the inventory quantities needed to satisfy market fluctuations.
Here are a few tips to consider while inventory forecasting:
- Be in constant communication with your supplier(s)
- Ensure you have enough stocks to handle any great demands
- Review sales estimate weekly, if not daily, to adjust the production numbers
2. Determine the holding expenses
The price of keeping inventory in a fulfillment center or warehouse space for an eCommerce retailer is referred to as the “holding costs”. This cost may vary depending on the products sold and their storage requirements.
The longer you store inventory, the higher the expenditure will be. Some products are more expensive to store than others (due to size, duration of storage, and special warehousing requirements like refrigeration). Thus it is cost-effective to keep inventory for a short period of time.
Thus, by calculating holding costs and your eCommerce warehouse expenditure, you can decide how much inventory can be maintained within your budget.
3. Identify the break-even point
The break-even point is when the supplier has no net loss or gain, i.e. total expenditure equals the total revenue. To prevent losses, the minimum amount of order or minimum order quantities should not be less than your break-point.
Supplier’s MOQ takes into account the number of products they must sell to this point and eventually turn a profit. Their expenses typically include the cost of the goods, administrative costs, shipping costs or delivery costs, lower inventory costs, overhead costs, labor costs, storage costs, customer acquisition costs, and any other expenses directly related to a sale.
At the same time, a seller’s MOQ should not be so high that it compels customers to buy from another eCommerce seller. You can also make an informed judgment as to how much each customer must order for you to break even. It will help you determine what the lowest possible MOQ is.
Formula to get your break-even point:
4. Define your MOQ
Now that you have gathered all the information and learned what a solid MOQ looks like, you may create a formula and a plan of action for putting it into practice. It will specify the minimum order quantities for each product type in your inventory.
The strategy will define how your team will offer incentives to clients whose order amounts are below the MOQ to encourage them to place larger orders. By establishing a MOQ, both buyers and sellers can gain benefits in terms of cost reductions, more inventory levels, and increased income.
BONUS TIP: Once the demand, holding costs, and break-even point have been determined, set your Minimum Order Quantity (MOQ) in accordance with the needs of your e-commerce business.
However, if you need help in setting MOQ, follow the below steps to do it correctly.
How to set minimum order quantity?
1. The first step in establishing a MOQ is examining your inventory management. This makes it easier to maintain a balance between supply and demand. As a result, you have the appropriate stock to meet customer demand and avoid unnecessary inventory costs.
2. Secondly, you must consider the supplier’s requirements. It will help to prevent placing large or small orders that can result in stock shortages or overstocking.
3. Next is to look at the demand trends of your products. Knowing the demand trends will help to compute the average order size and modify the MOQ. You can ensure you have excess inventory to satisfy customer requests and avoid stock shortages.
4. Additionally, it is also important to consider the overall cost of manufacturing, which includes labor, overhead, and raw materials when setting the MOQ. This may help to determine your MOQ to make a profit.
5. Evaluating the market is a crucial component to consider to ensure that your MOQ is competitive considering your rival’s MOQ.
6. Last but not least, you have to re-evaluate your MOQ periodically to make sure that it is relevant. This will help you maintain a good balance between stock and demand to ensure the success of your business.
We have learned how to set minimum order quantities, but how is MOQ beneficial for the suppliers and the buyers.
Minimum Order Quantity (MOQ) Benefits
The benefits of the minimum order quantity (MOQ) for suppliers and buyers are:
- No extra cost- MOQ lowers the cost of inventory management for suppliers by preventing overproduction and decreasing the chance of non-usage. This leads to a higher overall financial performance through more effective use of resources, reduced waste, and cheaper expenses.
- Desired profits- By imposing a supplier’s minimum order quantity (MOQ), suppliers can bargain for higher prices for their goods to get better profit margins. This enables them to achieve cost-revenue balance and increase overall profitability.
- Boosts Revenue – Setting a minimum order quantity obtaining payment for a specific number of units, and setting a low MOQ aids suppliers to have a healthy cash flow. It gives the suppliers a better understanding of their revenue.
- No overspending: When working with suppliers who have MOQs, buyers frequently know they are getting the best price per unit. Buyers can negotiate better prices and reduce their overall cost per unit by ordering in bulk and getting bulk buying discounts.
- Long-term support from suppliers: Bulk purchases can help you build a long-term relationship with a supplier, facilitating better future negotiations and cost savings.
Thus, embracing minimum order quantities streamlines direct-to-consumer orders, while mitigating the risk of higher administrative costs, ultimately boosting profitability.
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The software helps to optimize routes regardless of your number of orders. Thus, you can cover the costs of production and meet market demand with minimized costs. Ultimately, reducing the risk of overproduction and ensuring that the chain of supply runs smoothly.
Upper Route Planner makes it simple for the admin to ensure they supply their products in the minimum time. It provides real-time updates so that you can closely monitor the entire process.
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The significance of MOQ is that it helps suppliers control their manufacturing costs. Additionally, it helps buyers control their inventory levels, minimize waste, and guarantee that they pay less for the goods they purchase, even when they order in smaller quantities like low minimum order quantity. Thus, MOQ ultimately enhances the overall effectiveness of the logistics.
Minimum Order Quantity (MOQ) strikes a balance between the demands of suppliers and buyers. Several factors influence optimal order quantities; some of them are
- Production Costs
- Lead Time
- Market Demand
- Financial Considerations
- Management of inventories
Economic Order Quantity (EOQ) is used to determine the optimal order size and is generally used by buyers. Economic order quantity minimizes the cost of placing orders and maintaining inventory. Whereas MOQ is used by the suppliers to set the minimum spend requirements. It is the minimum quantity of items that must be bought to secure a good deal from the supplier to control the cost of production and attain a profit margin.
When making purchases, businesses should carefully consider MOQ because it can have a big impact on inventory management. Here are some of the ways that MOQ can affect inventory:
- Inventory Planning
- Inventory Costs
By following these steps, you can implement MOQ in a logistics network:
- Identify the suppliers
- Negotiate with the suppliers
- Establish inventory goals
- Create a system to monitor MOQ
We understood that a vital component of the logistics is the Minimum Order Quantity (MOQ). By implementing MOQ the suppliers can make sure they are buying the appropriate amount of goods to fulfill the customer demands, reduce the risk of stockouts, and maintain inventory turnover.
In case you are struggling with your logistics operation, we recommend you switch to automated software like Upper. With Upper, companies can streamline their routes, cut transportation costs, and boost productivity. Such advanced software can also help make informed decisions about inventory management and MOQ.
So, why wait? Book a demo today to explore advanced routing features on Upper.