What does MOQ mean? How to Calculate It and Why It Matters
Minimum order quantity, or MOQ, is an important term in business. It’s what you need to calculate before you can make a purchase. But what does it mean? How do you calculate it? And why is it so important? In this blog post, we’ll answer all of those questions. Read on to find out more!
What is MOQ
Minimum order quantity is a requirement from some manufacturers for the minimum number of orders to be purchased at one time. This is required in order for manufacturers to remain profitable, as often they work on smaller margins and require large order volumes to generate enough revenue to maintain their business.
High Minimum Order Quantity (MOQ)
Many companies impose a high MOQ in order to protect themselves from low-volume orders and the administrative costs associated with processing them. A high MOQ is often a sign that a company is looking for larger clients who are able to commit to buying higher volumes of products or services. It can also be a sign that the company has invested in specialised cost intensive equipment or materials to produce the product, and that it is not cost-effective to produce or sell in smaller quantities. Finally, companies may set a high MOQ in order to reduce the number of potential customers who might place orders but then never follow through with payment.
Low Minimum Order Quantity (MOQ)
A low MOQ simply refers to the number of products that a company is willing to produce for a customer. This can be helpful for businesses that are starting out and don’t have the capital to invest in large quantities of bulk inventory. It can also be helpful for businesses that are looking to test a new product or market as they are not tied to a high volume of products. A low MOQ is great for small businesses because it allows them to compete with larger companies. By being able to offer lower minimums, these small businesses can attract more customers and grow their business.
Why do suppliers use MOQs?
There are a few reasons why suppliers might use MOQs, here are some of the most significant:
- To protect themselves against losing money on small orders – if the supplier has to invest in producing a product, and then only sells a handful of units, they may not be making very much profit (or even breaking even).
- To control the number of products that are being produced – too many products can lead to chaos and inconsistency in quality, as well as storage and shipping issues.
- To ensure that customers are serious about buying their product – if there’s an MOQ, it means that the customer is committing to purchasing a certain quantity.
Why should I worry about MOQ?
It’s important for eCommerce businesses to work with suppliers to find a minimum order quantity that works for both parties. Driving down costs to achieve the lowest possible MOQ may be beneficial in the short term, but could harm a long-term supplier of your best-selling products.
Understanding and knowing how to calculate your MOQ is key to remaining profitable, whilst ensuring all of your products are in stock. Good inventory management software is essential to achieve this.
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? At James and James, we have Client Success Managers who can help you with forecasting and planning.
- Consider cost of space – if you own your own fulfillment center and warehouse 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. This is where James and James can help who provide flexible wall syndrome, where you have the option to scale up or scale down depending on seasonality and launches.
- 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 and when selling to your customers, use strategies such as bundles and BGOF to increase your average order value.
Three steps to implement Minimum Order Quantity (MOQ)
- Establish a MOQ for your products or services. This will help to ensure that you’re not overcommitting your resources and that you’re able to fulfill orders in a timely manner.
- Make sure to communicate the MOQ to your customers. This will help them understand your business’s limitations and avoid any confusion or misunderstandings.
- Stick to your MOQ! This will help keep your operations running smoothly and prevent any disruptions in service.
Factors that Affect MOQ
When calculating your costs, keep the following factors in mind:
– The quantity of the product that is being ordered
– The specifications of the product, including colour, size, and design
– The shipping location
– The manufacturing process
– The availability of resources, such as machines and personnel
– The company’s production capacity
Reorder quantity vs manufacturer requirements
When reordering products you will of course need to know what is your reorder point to keep your stock on the shelves but also what your manufacturing requirements are. It’s important to understand and build strong relationships with suppliers, in order to achieve the best rates but also stable rates and reliability to ensure you achieve a consistent margin for a long period of time.
Benefits of MOQ
- Economies of scale (bulk savings) can be achieved with a strong relationship with a manufacturer that allows you to achieve the best and consistent margin. In order to be able to forecast accurately, it’s important to be able to have consistency with your costs.
- Drive profitability through cheaper costs through bulk discounts and selling for a higher margin. Implement your own average order value strategies, such as upselling and cross-selling to boost your margins.
- The sweet spot where all of your products are in stock but you are not paying for unnecessary fulfillment space or have too much cash tied up in stock.
Benefits for Suppliers
- Increased predictability and stability in business – When a supplier knows that it will have a certain number of orders from a customer each month, it can better plan its production and make sure it has the necessary resources in place.
- More order opportunities – A supplier that meets MOQs may be given preference over other suppliers when new orders are being placed, which can help to increase business volume and improve its bottom line.
- Easier logistics management – With a set quantity of orders to fulfill each month, the supplier’s logistics department can plan accordingly and know exactly what their targets are.
Benefits for Buyers
- Lower prices – The main benefit of MOQs is that they allow buyers to purchase products at a lower price. This is because businesses usually offer discounts to those who order in larger quantities.
- Greater availability – When businesses have high MOQs, it can be difficult for smaller buyers to get their hands on the product. By ordering in larger quantities, buyers can ensure that they have greater access to the product and can buy it more easily.
- Easier inventory management – When orders are placed, a higher MOQ allows the buyer to negotiate better pricing and terms with suppliers. This means a good deal as well as sufficient inventory.
How to manage MOQ through inventory management software
James and James ControlPort order fulfillment software gives users insights into where their product levels are in real-time, allowing you to make decisions instantly to keep ahead of potential stock issues.
ControlPort is a cloud-based software that also offers analytics into seasonal trends and customer behaviour, which should be an essential part of your analytics tools.
It’s vital to be aware of seasonal trends that may affect your products, any launches or influencer activity that may cause a spike in sales. ControlPort as well as the Customer Success Managers can work with you to develop a strategy to achieve growth whilst avoiding stock issues.
Understanding your supply chain
In order for you to ensure your stock arrives at your fulfillment center at the right time, you need to know what tour lead times are to get a product from your manufacture into your fufliment service. Like with pricing, consistency is key here to ensure you have confidence in your supply chain to keep your stock available and your customers happy.
To learn how James and James can help with your fulfillment, storage, and inventory management, click below to contact one of our inhouse experts.
How Does Minimum Order Quantity (MOQ) Impact Inventory?
Minimum order quantity (MOQ) is the quantity of stock that must be ordered in order to receive discounted pricing. It is a common business practice among suppliers to offer lower prices for larger quantities.
However, MOQ can also impact inventory in other ways. For example, if the minimum order quantity is too high, it may not be possible to meet customer demand. This could lead to stockouts and lost sales. Additionally, large orders can be difficult and costly to manage, especially if the products are perishable or require special handling.
Therefore, it’s important to consider all aspects of MOQ when making purchasing decisions. It’s important to find a balance between price discounts and inventory costs. Ultimately, the right MOQ for your company will depend on your specific business needs and the type of products you’re ordering.
How to Choose a 3PL for Your Ecommerce Business
There are a few things to keep in mind when choosing a 3PL for your eCommerce business. First, you’ll want to make sure that the 3PL has experience shipping products to customers’ homes. They should also have a good track record of delivering goods on time and without any damage.
You’ll also want to ask the 3PL about their shipping and fulfilment capabilities. For example, can they ship orders internationally? Can they handle large or complex orders? And do they have the ability to print shipping labels and track packages in real-time?
Here is a few more key considerations when choosing a 3PL:
- Reputation and experience – Make sure the 3PL has a strong reputation and years of experience in the eCommerce space. They should be affordable, reliable and able to provide case studies and testimonials from current or past clients.
- Scalability – Your eCommerce business is likely to grow rapidly, so you need a 3PL that can scale with you. They should have the infrastructure and resources in place to handle increased order volume without any disruptions or delays.
- Technology stack – A modern 3PL will have a state-of-the-art technology stack that enables them to manage orders. James and James use their award winning ControlPort software to do this effectively and efficiently.
How Can I Make the Most of Minimum Order Quantities
When it comes to making the most of minimum order quantities, it’s important to keep in mind the overall goal of the order. If you’re looking to save money, you’ll want to make sure that you’re taking into account not just the cost per unit of the product but also the shipping and handling fees.
If you’re looking for a specific product that’s not available in your area, contacting a supplier who offers minimum order quantities may be your best bet. By ordering in bulk, you can often get a lower price per unit as well as free shipping. Just make sure that you have a plan for how to store and use all of the product once it arrives!
At the end of the day, it all comes down to what your business needs and how much shelf space you have available. Try experimenting with different quantities and see what works best for your operation.
How to Calculate Minimum Order Quantity (MOQ)
As mentioned above, there are a number of factors you must take into consideration when calculating MOQ. However, in its most basic form, you can calculate MOQ by using this formula:
MOQ = (Annual Usage x Price) / (Unit Cost + Setup Cost)
Remember that this is a very basic calculation. Think about your own business requirements and adjust accordingly.