To run a successful E-commerce business, having the right amount of inventory is crucial. While you need to meet the demand, you don’t want to hold onto stocks you can’t sell.
But here’s the thing— sourcing and managing inventory aren’t that simple. As an E-commerce seller, you’d need to choose a supplier who doesn’t only sell at the right price but also allows you to order an optimal amount of units.
There is a Minimum Order Quantity (MOQ) in the picture. Most manufacturers set a MOQ to make buyers like yourself to commit to buying enough to ensure they’re making a profit.
But what is MOQ, and why do suppliers need to impose such constraints? What impact does MOQ have on your inventory, and how can you optimize your purchase orders with MOQs without risking your business? These are some of the questions we will answer in our blog. Read along!
What is the Minimum Order Quantity?
Minimum Order Quantity (MOQ) is the minimum number of units suppliers want their buyers to purchase in a single order. MOQ is usually expressed as a minimum number of units, but suppliers sometimes set it for the order value. For example, a supplier, XYZ Ltd., may only accept an order valued at more than $10,000.
The MOQ ensures a sufficient quantity of products to justify production or procurement costs. As a result, it reduces costs and streamlines production processes.
Manufacturers or suppliers typically use a minimum Order Quantity, but E-commerce merchants can also implement it when selling bulk orders to their retailers.
Here are some examples of MOQ:
- A Manufacturer’s MOQ maybe 10,000 units. It means a buyer like you must buy at least 10,000 units of inventory at a time.
- Likewise, a brand can have an MOQ requirement of wholesale or retail partnership where they must purchase a minimum of 1000 units or $1000 worth of product from you.
In our next section, let’s try to understand why suppliers set Minimum Order Quantity constraints for buyers.
Why do Suppliers Set a Minimum Order Quantity (MOQ)?
Suppliers, similar to any other business, face various costs and limitations. Ultimately, they must make some profit from each order to cover expenses such as transportation, storage, handling, and administrative costs. These overhead costs may only represent a small portion of the order’s total value, but smaller quantities can significantly reduce the profit margin.
Let’s look at the below scenarios to better understand the importance of MOQ:
As you can see in the first case (case A), the supplier makes a handsome profit. However, in the second case (case B), where the order quantity is small, the supplier makes a lower profit.
In the last case, where the supplier is selling individual units, they would make a loss on each transaction, making it the worst option possible.
Suppliers often set minimum order quantities to protect their margins, as selling products in small quantities is not financially viable for them. This simple example illustrates the reasoning behind this practice.
In our next section, let’s understand how MOQ impacts you as a buyer.
Impact of Minimum Order Quantity (MOQ) on Inventory
A supplier’s MOQ, whether high or low, can significantly impact your business. For example, it will affect the inventory level you hold, the frequency at which you place the order, and the amount of working capital you tie up in the purchase order.
Let’s take it a step further and understand how high MOQs and low MOQs affect your inventory and overall business.
Suppliers with high MOQs require you to order a significant amount of inventory, which may involve longer lead times. As the stock would be larger, it would also take up more space in your warehouse and reserve a massive chunk of your working capital. Further, there’s also the risk of holding onto the stock for a long time and making it obsolete.
However, there’s also a positive side to high MOQs. The administrative costs will be lower, as orders will need to be placed less often. Also, you’ll be able to buy more at lower prices, and the chances of running out of stock will also be low.
Ordering from a supplier with a low MOQ means there will be fewer products available. Depending on the customer demand, you may need to restock your inventory repeatedly which, in turn, may increase the administrative or shipping costs. As low MOQs mostly lead to small inventories, there’s always a risk of not having enough products in hand. In such cases, if there’s a sudden surge in demand, you might not be able to handle it, which can lead to a loss of revenue.
But there’s also a silver line— low MOQ decreases the working capital investment. Further, this reduces the chances of your stock becoming obsolete over time.
The table below shows the impact of high and low Minimum Order Quantity:
Benefits of MOQ for Buyers
Here are some of the benefits of MOQ for buyers
Improved efficiency and reduced costs: When you purchase bulk orders, you can streamline your operations and reduce costs associated with ordering and receiving products. It includes reducing transportation costs and the time and resources needed to place and process orders.
Greater inventory control: Buying in bulk allows you to maintain an extensive inventory, which can help you avoid stock-outs and meet customer demand more effectively. It also allows you to take advantage of special deals or discounts that may not be available if you only purchase small quantities.
Lower risk of price fluctuations: By purchasing in bulk, you can lock in prices for an extended period, which can help reduce the risk of price fluctuations. Setting up MOQs with your suppliers can provide greater stability for your business and help you plan and budget more effectively.
Overall, purchasing in bulk can offer numerous benefits for buyers, including cost savings, improved relationships with suppliers, and greater efficiency and control. However, it is important to carefully consider your needs and negotiate with suppliers to ensure you get the best business deal.
Benefits of MOQ for Suppliers
Here are some of the benefits of setting a MOQ for suppliers or manufacturers.
Improved Cash Flow: When the suppliers set the MOQ, they take the total inventory cost into account, along with all the other expenses they had to make, before reaching the right profit level. With MOQs, they can streamline and better manage their cash flow.
Reduced Inventory Costs: Some manufacturers don’t have the warehouse space to hold finished products and usually start production only after receiving a MOQ purchase order from the buyer. This, in turn, keeps the stock out of their warehouse and reduces inventory and manufacturing costs.
Increased Profit Margins: By setting up MOQs, suppliers can have better control over their profit margins. They will only take a purchase order when there is enough profit behind it.
Types of MOQ
There are two types of MOQ— simple and complex, depending on the economic constraints associated with the orders.
Simple MOQ: This is the most common type of MOQ offered by suppliers. A simple MOQ has a single restraint in order and can be set as a minimum spend or a minimum quantity ordered. For example, while buying from a watch manufacturer, you might have to order at least 200 items minimum or $1000 worth of supplies.
Complex MOQ: As the name suggests, Complex MOQ is not that straightforward. Here instead of keeping a single restraint of number or spend amount like in simple MOQ, the supplier has two or more requirements to fulfill the order.
For example, suppose you are ordering from a cloth manufacturer. In that case, you might have to purchase with additional restraints such as minimum order per colour, or type of fabric.
How to Calculate Minimum Order Quantity
While there’s no direct formula to set the MOQ, there are four steps that can help you set the MOQ as per your business needs.
Step 1- Determine the Demand
As a merchant, it’s important to consider various factors, such as product type, competition, seasonality, and others, when forecasting demand for your inventory. This data can help you determine the appropriate quantity to order for your next purchase. Inventory forecasting is also important in ensuring that your supply matches the anticipated demand.
When placing an order with a manufacturer, you should consider the minimum order quantity required and compare it to your estimated sales volume. It’s also important to factor in the time it will take to get the inventory ready to ship, including lead times, freight transit times, and any potential delays with your third-party logistics provider.
To better manage demand, especially during volatile times, it’s helpful to stay in close communication with your supplier, maintain a sufficient safety stock, and review your sales forecasts on a regular basis to adjust production quantities as needed.
Step 2: Calculate the Break-even Point
To determine the MOQ, you need to consider your break-even point. It may start with the second transaction for D2C orders when you recover the customer acquisition costs and your customers make another purchase through your marketing efforts.
For retail wholesalers, Consider offering volume discounts in exchange for a higher order value, but ensure that your profit margins are not too low. It is common for these discounts to be offered for larger quantities rather than charging a higher price for smaller quantities.
Step 3: Understand your Holding Costs
Holding costs are the costs incurred by storing inventory. These costs include storage fees, insurance, taxes, shrinkage, obsolescence, and more. The total cost of holding inventory will vary depending on the inventory size, the product storage type, and the storage facility itself.
Step 4: Now Decide your MOQ
Let’s assume you consistently have relatively high demand. Your retail partners buy on average 1000 units per order, and you need to sell at least 550 units per order to be profitable. Now, if your customers were willing to purchase 1000-unit orders in the past, you can set 1000 units as your MOQ or even get down to 550 and stay profitable.
Tips for Optimizing your MOQs
Here are some of the tips to optimize your minimum order quantity
Incentivize a Higher Spend on Order
Whether you’re in retail or wholesale, you need to set a MOQ for bulk orders to ensure that retailers pay a minimum amount in exchange for products. In addition, you can further incentivize MOQ purchases by offering bulk discounts to retailers.
Also, you can adjust prices to incentivize higher spending by setting MOQs based on volume or cost. For low-cost items, a higher MOQ is necessary to ensure profitability.
Conversely, a lower MOQ can be used for higher-cost items, as the items are already expensive. This strategy will help you make a profit no matter what quantity you sell.
You can also apply this strategy to direct-to-consumer orders by requiring a minimum number of products to be purchased or by implementing a minimum spend threshold for free shipping.
Get Rid of Slow-Moving SKUs
Many times, brands end up with too many SKUs, leading to unnecessary costs for storage and minimum order quantities for low-selling or unprofitable products.
Keep a close eye on SKUs that are selling quickly and those that have been sitting in storage for a long time. Then, cut down on these slow-moving SKUs. Remember, it’s much easier and more cost-effective to manage fewer items. Reducing the number of SKUs can help streamline operations and improve efficiency.
Boost Inventory Turnover
By ordering a larger quantity of inventory, you will be motivated to sell your inventory more quickly in order to achieve a higher inventory turnover ratio. This does not necessarily mean that you should only rely on flash sales but rather explore other strategies to attract and retain customers.
However, if you have not yet proven the success of your business model or product-market fit, it may be wiser to avoid ordering a large quantity of inventory, as it could result in a financial loss that cannot be recovered, as well as added warehousing costs.
Focus on Building the Relationship
By starting off on good terms with your suppliers and consistently maintaining a solid relationship, you can ultimately benefit from improved terms and greater flexibility.
To achieve this, focus on selling your vision to the manufacturer and ensuring that your E-commerce business continues to thrive. Always treat them respectfully and view the relationship as a partnership rather than just a transaction.
If a manufacturer is unwilling to work with you, consider finding another partner to support your success. In today’s world, building and maintaining strong partnerships is more important than ever.
MOQ is a critical concept when it comes to ordering and stocking inventory. While there is no one size fits all number here, you’ll need to find the MOQ per your business needs. Finding the right MOQ will help you scale your business and keep it profitable.
Now that you know what the minimum order quantity is, how to calculate MOQs, and how they impact your inventory and business profits, you are ready to start sourcing suppliers, negotiating MOQs, and building long-term partnerships.
In our upcoming articles, we will discuss more interesting topics. Stay tuned!
In the meantime, we would love to hear how you manage MOQs in your business. Let us know in the comments below.
How Can ANS Commerce Help?
If you aren’t looking at managing your own fulfillment warehouse and are interested in outsourcing inventory storage and E-commerce fulfillment, we can help!
ANS Commerce provides end-to-end fulfillment and logistics services, including warehouse management, supply chain management, multi-category storage support, and return management. In addition, our Just-In-Time flexibility ensures your inventory is always on track.
Schedule a free consulting session with our experts today to learn more about our warehouse management services.