A complete guide to minimum order quantity: meaning, calculation, and importance
Let’s face it; having the right level of inventory is crucial to running a successful e-Commerce business. While you need to fulfil the demand, you don’t have to stock up inventory you can’t sell.
However, it’s not that simple. Here’s the thing: as an e-Commerce business, you need a supplier who sells you products at the right price and in optimal quantities.
Yes, we’re addressing the elephant in the room—minimum order quantity (MOQ). Manufacturers set this metric to make sure you, as a buyer, commit yourself to purchasing enough stock so that they’re turning in a profit.
But what is MOQ, and why do suppliers impose this constraint? How can you optimise your MOQ with a dedicated e-Commerce solution without risking your business?
Learn the answer to these pressing questions in our blog. Read on!
Meaning of MOQ: what is it?
Minimum Order Quantity is the minimum quantity of units suppliers want you to purchase in a single order. It’s usually expressed as a volume of units. However, some suppliers also have a minimum order value.
For instance, a supplier, ABC Enterprises, may only deliver orders valued at Rs. 1 lakh or above.
This value is set to ensure an adequate quantity of products to justify procurement and production costs. Ultimately, it reduces expenses and streamlines production.
MOQ is usually set by suppliers or manufacturers. In some cases, e-Commerce businesses also apply it when selling in bulk to retailers.
Here are some instances of MOQ:
If a Manufacturer’s MOQ is 5,000 units, it means you must buy at least 5,000 units of inventory at a time.
Similarly, you can have an MOQ requirement for a retail and wholesale partnership where they must purchase $1000 worth of or a minimum of 1000 units of product from you.
Also Read: 4 ways to streamline your e-Commerce operations with a logistics management software
How to calculate MOQ: minimum order quantity formula
The process of calculating MOQ varies in complexity based on the industry and the product. It will not be static.
As raw materials and parts change prices down the supply chain, manufacturers or suppliers may need to alter the MOQs and prices to stay competitive, particularly if they are operating on low margins.
e-Commerce platforms like inventory or order management software can help you keep track of the dynamic nature of MOQs and ensure precise calculations.
Software that is directly integrated with an ERP (enterprise resource planning) platform can also be useful, as it brings together data from various functions of your business into one single platform.
For instance, e-Commerce solutions like supply chain management software can be integrated with finance management software so that suppliers have accurate, up-to-date information on component parts and raw materials to calculate accurate MOQs.
As for the minimum order quantity formula, there’s no set formula. But here are some standard considerations to keep in mind when making MOQ calculations.
1. Examine Demand
Consider the historical data and based on it, forecast demand. If you are receiving orders of around 500 units and you make the MOQ 2000, it might not be feasible. Other considerations include seasonality and lead times (how long it takes to produce an order).
2. Determine Holding Costs
How much cost is the supplier bearing to store products? This varies from item to item. For instance, some products may have odd shapes or need to be stored in a cool or hot environment. This makes inventory management difficult. Also, holding such inventory for long is never ideal. And these costs need to be accounted for in your MOQs.
3. Find Where It Breaks Even
If a supplier wants to sell 100 units at a fair market price, would they turn a profit? How about 1000? Overhead costs like setup charges, labour, and other delivery-related costs need to be accounted for. Eventually, they will find the break-even point, which is essential to calculating MOQ.
Why is minimum order quantity important?
MOQ is essential for both the supplier and the buyer who purchases inventory from the supplier. Suppliers set MOQs after considering not only the cost of the products but also the expenses incurred while sourcing them. Setting an MOQ helps suppliers improve their profits and also ensures that their inventory sells off quickly.
On the other hand, MOQs allow the buyers to get the best price possible for each unit, because products are purchased in bulk. Doing so lowers the per-unit cost, allowing the retailer to maximise their profits, too.
Final words
Buyers may be tempted to lower the MOQs, while suppliers may look to increase them. On one hand, low MOQs may force suppliers to produce low-quality products so that they can continue to turn in profits.
High MOQs, on the other hand, reduce the profit-making ability of the buyer and also cause inventory-related issues like overstocking and dead stocks.
If you’re facing issues related to the minimum order quantity, Ordazzle’s inventory and order management software can help you optimise your inventory and warehousing efforts effortlessly.
Along with MOQs, our e-Commerce solution also helps you figure out the inventory turnover rate to ensure optimum levels of inventory and no wastage of money, space, or any associated resources.
Get in touch today and take charge of your inventory effectively.