Minimum Order Quantity | How to Calculate It
In ecommerce, there are certain factors that may be invisible to end-users but dictate the delicate dynamics between supply and demand. One such factor is minimum order quantity.
This term may sound like jargon to newbies, but it’s crucial to understand it as it can shape the strategy and operations of businesses.
Let’s unwrap everything you must know about minimum order quantity, including tips to negotiate with suppliers.
What is Minimum Order Quantity (MOQ)?
MOQ (minimum order quantity) is the least amount of stock a supplier is willing to sell to a retailer. That said, it sets a threshold that a retailer has to meet or exceed for a transaction to push through.
MOQ can vary depending on product types and across various industries. For instance, a manufacturer of custom machinery might have a much higher MOQ compared to a wholesaler of more generic, fast-moving consumer goods.
Image 1. Minimum Order Quantity (Source Retail Dogma)
The significance of MOQ extends beyond a mere figure. Minimum order quantity in inventory management is a strategic tool for manufacturers and wholesalers.
For retailers, dealing with a minimum quantity order means balancing compliance with the MOQ and minimizing costs associated with inventory management on Amazon and other platforms. Achieving this balance often means one has to negotiate and plan.
Benefits of Setting an MOQ
Setting a minimum order quantity offers strategic advantages for both suppliers and sellers:
For Suppliers
Better Inventory Control and Reduced Warehousing Costs. By establishing a minimum order quantity, suppliers can predict the volume of products they need to produce and store with greater accuracy.
Ensures a Minimum Profit Margin. MOQs ensure that each order generates a minimum level of revenue, safeguarding the supplier’s bottom line. This calculation takes into account the costs of production, labor, and materials, setting a threshold that guarantees profitability with every transaction.
For Sellers/Retailers
Economies of Scale. One of the silver linings for retailers navigating MOQs is the opportunity to tap into economies of scale. Purchasing in larger quantities often secures a lower per-unit cost, stretching the value of each dollar spent and potentially beefing up profit margins on the sales floor.
Economies of scale (Source – Corporate Finance Institute)
Strengthening Supplier Relationships. Regularly meeting or exceeding MOQs can cement a retailer’s reputation as a reliable partner, potentially opening the door to preferential pricing, exclusive deals, or more flexible payment terms in the future. It’s a foundational element for building long-term, stable relationships with suppliers.
Factors Influencing MOQ
Minimum order quantity varies by industry, depending on several factors.
Product Nature and Production Costs
High-value items with complex manufacturing processes naturally come with higher MOQs due to the increased production costs involved. Conversely, simpler, low-cost items can often be produced in larger quantities with lower MOQs.
Order Volume and Market Demand
High-demand products might see lower MOQs as suppliers seek to capitalize on their popularity by making them more accessible to a broader range of retailers. In contrast, niche or seasonal products might have higher MOQs to ensure enough sales volume justifies the production effort.
Raw Materials Availability
If a product requires rare or hard-to-source materials, suppliers might set higher MOQs to ensure that each production run is economically viable. This consideration ensures suppliers can manage their supply chains effectively and avoid production disruptions.
Shelf Life and Storage Considerations
Products with limited shelf life or specific storage limits often come with tailored MOQs to ensure they are sold and consumed before expiring. This is particularly relevant in the food and pharmaceutical industries, where the freshness of products is a critical consideration.
Is There a Minimum Order Quantity Formula?
If you want to know how to set an MOQ, you won’t find a one-size-fits-all formula. Instead, the equation could be based on various factors.
Basic calculations would involve the following:
Cost Analysis. Cost of production or acquisition per unit, including any volume discounts or economies of scale.
Demand Forecasting. The estimated expected sales volume to align with customer demand without leading to overstocking or dead stock.
Storage and Handling Costs. Expenses related to storing and managing inventory performance index, including warehousing, insurance, and potential obsolescence or depreciation.
Supplier Conditions. Understanding supplier terms, such as discounts for larger orders or penalties for smaller orders, to negotiate the best possible terms.
Why should retailers know how to calculate minimum order quantity even if it’s the wholesalers who set it?
Negotiation Leverage
Understanding MOQ calculations allows retailers to negotiate better terms. Knowledge of factors affecting MOQs can empower retailers to engage in more informed negotiations with wholesalers, potentially leading to more favorable buying conditions.
Inventory Management
Though stock management tools can help avoid overstocking and understocking, understanding MOQ enhances the efficient use of these tools, allowing retailers to plan their inventory levels better. This knowledge helps forecast demand more accurately and decide when to place orders.
Cost Optimization
MOQ directly impacts cost per unit, shipping, and storage costs. Retailers who grasp the principles behind MOQ can make decisions that optimize their costs. For example, ordering just above the MOQ can sometimes significantly reduce the cost per unit, improving margins.
Strategic Sourcing
Retailers who understand MOQ can identify and select suppliers whose MOQ policies best match their sales volume, storage capabilities, and cash flow. This strategic sourcing ensures that retailers aren’t forced into unfavorable conditions that could hurt their operations.
MOQ vs. EOQ: Understanding the Difference
When learning about MOQ, another term related to supply chain management often presents itself: economic order quantity or EOQ.
EOQ is a formula used by businesses to determine the optimal number of units to order, aiming to minimize the total costs associated with ordering and holding inventory.
Economic Order Quantity (Source – iEduNote.com)
The formula is given as EOQ = √(2DS/H) with the following variables:
D = annual demand
S = ordering cost per order
H = holding cost per unit per year
This calculation enables companies to determine the most cost-effective order quantity, balancing the costs associated with ordering and storing inventory to ensure profitability and efficiency in inventory management.
Let’s compute a sample EOQ with the given variables:
Annual demand (D) = 12,000 units
Ordering cost per order (S) = $50
Holding cost per unit per year (H) = $2
The EOQ would be calculated as follows: √((2 * 12,000 * 50) / 2), which results in an EOQ of approximately 774.6 units.
Given the scenario of the sample computation above, a business should aim to order 774.6 units each time it places an order. In practice, a business would round this number to the nearest whole unit, depending on their specific needs and policies.
MOQ and EOQ Comparison
While MOQ is set by suppliers and dictates the minimum quantity of an item a retailer must purchase in a single order, EOQ focuses internally on the retailer’s perspective, calculating the most cost-effective order quantity.
MOQ is about meeting supplier requirements, often influenced by production and logistics considerations. In contrast, EOQ is about finding an economic sweet spot that minimizes costs for the retailer.
Despite their differences, MOQ and EOQ can complement each other within a retailer’s inventory management strategy. Understanding both figures allows businesses to navigate their ordering processes more effectively.
How to Negotiate MOQ with Suppliers
For small businesses, particularly those selling on platforms like Amazon, negotiating MOQs with suppliers is a critical skill. Here are a few tips to comply with MOQs without overstocking.
Build a Relationship
Suppliers are more likely to negotiate with businesses they trust and see a future with. Prioritize building a strong relationship and communicate your growth plans that show potential for larger orders in the future.
Leverage Your Sales Data
Use your sales data from Amazon to project future sales and present these projections during your negotiations. If suppliers see the potential for growth, they may be more willing to lower their MOQ.
Seller Central Dashboard (screenshot from Amazon Seller University)
Offer to Pay a Higher Price per Unit
In some cases, paying a slightly higher price per unit in exchange for a lower MOQ can be more cost-effective than holding excess inventory. Calculate these costs ahead of time to know what price increase you can afford.
Consolidate Orders with Other Sellers
Join forces with other Amazon sellers to meet MOQ requirements. This can be particularly effective for sellers within the same niche or those who share a similar customer base.
Frequently Asked Questions (FAQs)
What is EOQ and MOQ?
MOQ, or minimum order quantity, is the smallest quantity of a product that a supplier is willing to sell.
EOQ, or economic order quantity, is a formula used by businesses to determine the optimal number of items to order, aiming to minimize the total costs associated with ordering and holding inventory.
How do you ask for MOQ?
Directly reach out to the supplier or manufacturer through email or their designated contact method, expressing your interest in their products. Politely request details on the MOQ, and consider mentioning your business needs or order plans.
Author
Carla Bauto Deña is a journalist and content writer producing stories for traditional and digital media. She believes in empowering small businesses with the help of innovative solutions, such as e-commerce, digital marketing, and data analytics.
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