No matter whether you have a B2B business or a B2C business, you probably prefer large orders as compared to small ones. This is where minimum order quantity or MOQ comes into the picture.
MOQ helps to ensure that the orders are profitable, cost-effective, and include a consistent gross margin. If you are unaware of the minimum order quantity, then you are at the right place. Here is an article with all you need to know about minimum order quantity and how to make the most out of it.
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All About MOQ
Many manufacturers determine the minimum order quantity to get the customers committed to buying enough to ensure cost-effective production and make adequate benefits. Minimum Order Quantity is the fewest unit decided by the supplier for a particular product to sell. When it comes to e-commerce, it is usually the smallest inventory amount that a buyer can purchase from the supplier at a given time. Continue reading the article to know more about MOQ.
What is MOQ?
MOQ is an abbreviation used for Minimum Order Quantity. It refers to a system used by manufacturers to sell enough products and stay profitable. MOQ is used to determine the minimum order a buyer can place. Moreover, it also tells the minimum number of products that a manufacturer is planning to produce or a seller is planning to sell.
In the world of e-commerce, MOQ is often used by suppliers or manufacturers in the context of a production run. However, a merchant can use MOQs in a place for different types of products.
Let’s understand MOQ with an example. If the MOQ of the manufacturer is 100 units, you cannot purchase less than 100 units of the inventory at a given time. Apart from this, you can also determine minimum order quantity using dollar amounts. For instance, your customer needs to make a purchase of a minimum of $100.
Advantages of MOQ
Let’s understand MOQ with an example. If the MOQ of the manufacturer is 100 units, you cannot purchase less than 100 units. Now that you know what is MOQ is, the next question is what makes MOQ a favorable policy? Minimum Order Quantity helps wholesellers to manage their inventory in a more effective manner. It provides them an idea about the minimum quantity of an order that an enterprise is required to have. Let’s dive into some of the primary advantages of MOQ.
Higher Profit Margins
By managing a balance between inventory holding cost and demand, businesses can produce larger quantities as a result of guaranteed demand, which in turn helps to generate higher profits. Minimum order quantity is always associated with demand. It always allows companies to give out a higher volume of products even at a low minimum order quantity.
Lower Freight Cost
As compared to the shipping cost of goods, the shipping cost of ordering raw material is often high. It also gives rise to handling charges and other related costs. Manufacturers can attain the best shipping rate from the suppliers by setting the minimum order quantity to an optimum level. In this way, minimum order quantity helps to reduce the freight cost.
Secure Cash Flow
Minimum Order Quantity not only helps to ensure a secure cash flow but also enhances it. However, the minimum order quantity of manufacturers should be balanced according to the client’s requirements.
Builds Strong Relationships
Customers who buy the average order quantity or above are more likely to return. Moreover, these types of customers are more invested as they spend more on their purchases. Building strong relationships with the customers and developing a loyal customer base is among the biggest advantages of MOQ.
How to Decide MOQ?
There is no specific amount of MOQ, as different businesses have different needs. Therefore, there is no decided formula for calculating MOQ. In order to help you decide on the MOQ, we have rounded up a few steps. You can use these steps as a starting point to make the calculation of MOQ easier.
Determine the Demand
Inventory forecasting and demand depend on each other. Both the supplier and the buyers need to decide the total number of units they plan to transact in order to decide the minimum order quantity.
The more the number of products is getting purchased, the lower would be the MOQ for the supplier. However, the minimum order quantity is decided by the supplier, below which they would not supply the order, no matter how large the overall order for the products may be.
Get an Idea About Your Holding Costs
Maintaining inventory itself holds a remarkable cost. Therefore, in order to reduce the cost, the sellers need to store lesser inventory items. Holding cost plays a crucial role in deciding the minimum order quantity.
The more is the inventory held by the suppliers, the more they are inclined towards selling them through. Therefore, a high holding cost can lead to higher MOQs.
Calculate the Break-Even Point
The break-even point refers to the price at which the supplier has no profit or loss. For instance, if a supplier purchases a product at $50 and sells it further at $50, then the supplier has attained break-even. It is mandatory to know the break-even point for a transaction as it renders the baseline for MOQ. In most cases, the MOQ is above the break-even point.
Develop a Strategy for Determining MOQ
Though break-even points, demand requirements, sales data, and holding costs make it easier to calculate the minimum order quantity, a business needs an appropriate strategy to calculate the ideal MOQ.
Supply chain management and business relations play a crucial role in calculating the MOQ. Any supplier would wish to have a bigger MOQ to reduce the cost, but it is up to the buyer to negotiate properly. As there are no fixed rules for calculating minimum order quantity, it varies from transaction to transaction.
The other challenge while creating a strategy on MOQ is utilizing the available data. Even with all the available information like break-even, holding cost, etc., it is daunting to calculate the weightage for all the factors. It all summon up to long-run financial strategies of the supplier. Make sure to pay attention to all the major as well as minor details while creating a strategy.
Tips to Work with MOQs
MOQ may seem a bad idea if you are the buyer, but an amazing idea if you are the seller. Many e-commerce sellers prefer working with manufacturers with MOQ requirements, and some brands create their own MOQs. No matter in which position you are in, here are some amazing tips to make the most out of MOQs.
Never Hesitate to Negotiate the Price
In order to determine MOQ, you need forecasting, which requires good human intelligence. Though there are restrictions to how much a person can negotiate, there is always a possibility to crack better deals.
Go Online
Whether you are a business or a customer, the best way to find better deals is to go online. The wholesale business is highly competitive; therefore, there are a lot of alternatives and higher chances to find better offers.
The boom in inventory management has allowed suppliers and retailers to sell online and deliver products over longer distances, which in turn helps to get better prices. So, if you are a seller or a manufacturer, it is a good idea to sell online to get a good price for your products.
Get Rid of Slow-Moving SKUs
Inappropriate management of stock-keeping units or SKUs can negatively impact the handling costs. Therefore, it is essential to get rid of the slow-moving SKUs present in your system to manage better deal with MOQ.
It is often witnessed that many businesses, especially the new ones, create more SKUs than they can handle, which eventually leads to inventory management issues and losses. Slow-moving SKUs are one of the most important factors, and people usually ignore them. Make sure to eliminate all your SKUs that are slow-moving. It will not only help you to manage your MOQ but also will be beneficial to save inventory costs.
Build Strong Relationships
Building good relationships with your business partners and transaction counterparts is always a good idea. It always proves helpful in the long run. Your friends and transaction partners can always help you to grab a better deal. In addition to this, building strong relationships can also be beneficial to change the structure of MOQs.
Under the Umbrella
Minimum order quantity is usually the least number of products that a seller sells at a given time. It not only helps to save the inventory cost and sell more products but is also beneficial to boost the profit margins.
Calculating MOQs for your business is not rocket science. All it requires is logic, negotiation, and experience to be a pro at it. When calculating your MOQs, don’t be scared of negotiation and always try to find out better deals. MOQs are the best way to deliver products and save costs. Therefore, always ensure to be careful while deciding your MOQ.
Effectively Implement MOQ with Fulfillment Hub USA
The best MOQ differs across different businesses according to the needs and demands. Deciding on the right benchmark for MOQ requires a lot of research and thoughtful planning. Finding the right MOQ for your business can help you take your business to the next level. If you find it difficult to implement the MOQ effectively, then Fulfillment Hub USA is the best solution for you. We can help you execute your decided minimum order quantity in an efficacious manner. For more information about inventory management, MOQ, and fulfillment storage, 3PL fulfillment, feel free to contact us.
FAQs About 3PL Fulfillment Costs
What is MOQ?
MOQ or minimum order quantity is the minimum quantity of a particular item that a seller is selling at a given time.
What is the importance of MOQ?
Sellers use MOQ to sell enough products and stay profitable.
How to calculate MOQ?
In order to calculate the MOQ for your business, you need to determine the demand, check the holding costs, calculate the break-even point, and develop a strong strategy.
What are the advantages of MOQ?
The primary advantages of MOQ include lower shipping costs, higher profit margins, and secure cash flow.
