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inventory management

Minimum Order Quantity for Businesses: Improving Inventory Management

By QuickBooks Australia

Published on May 31, 2024

What is a minimum order quantity and how to calculate it

Inventory management is a crucial aspect of running and growing any business that offers products for sale. The goal is to maintain an optimal amount of inventory at any point in time. Achieving the delicate balance between holding too much inventory and not having enough to meet consumer demand means you’ve hit the bullseye with your MOQ.

But first, what does MOQ mean? MOQ stands for the minimum order quantity necessary to determine the optimal quantities of products made available for sale and the required materials to enable that sale.

In this article, we explore everything you need to know about minimum order quantity (MOQ) so you can make the necessary improvements to your inventory management system.

Let’s take a deep dive into minimum order quantity, examining:

What MOQ is
Various types of MOQs (low, high, simple and complex)
How an MOQ affects inventory
The formula to calculate your MOQ
How to calculate the MOQ: demand, break-even point, holding costs
The difference between MOQ and economic order quantity (EOQ)
The benefits of MOQ for suppliers and buyers
How QuickBooks can help you manage your MOQ
FAQs

What is the minimum order quantity?

Minimum order quantity (MOQ) is a tool used by suppliers and retailers to determine the minimum ordering quantities to buy and sell. The MOQ refers to the minimum number of units of a single SKU (stock-keeping unit) that a buyer must purchase in order for a seller to fulfil an order. Retailers use SKUs to identify and track their stock through unique codes. Each code contains distinctive characteristics of each product, such as the manufacturer, brand, colour or size.

Suppliers apply MOQ requirements because they face cost and other constraints. Suppliers need to ensure that they achieve a minimum amount of profit margin on every sale made. When an order is small (and what is small varies for each supplier), the costs suppliers bear can eat into the profit margin.

Different suppliers may have different MOQs even when dealing with identical products because each considers their business model and circumstances. It is for these reasons that MOQs are often required.

Types of MOQ

MOQs are typically categorised by size and complexity. A low MOQ and a high MOQ are categorised by their size while a simple MOQ and a complex MOQ are categorised by their complexity.

Low MOQ example

A low MOQ typically involves a small number of units, such as in the 1-50 range. This may be an indication that the business is a startup or employs a just-in-time inventory management system.

A low MOQ could because for concern. You should investigate further how the business can afford to sell this quantity and yet maintain profitability.

High MOQ example

A high MOQ, on the other hand, typically involves a much larger number of units, though there is no strict threshold. While the larger number can feel burdensome, a high MOQ brings several advantages.

It can mean more savings which can be passed on to the consumer. A supplier’s sales teams may also have fewer sales to fulfil, reducing administrative expenses.

Simple MOQ example

A simple MOQ involves a single factor. This could be in the form of order value (the dollar amount) or a minimum number of units ordered (for example, 100 units).

Complex MOQ example

A complex MOQ considers two or more factors when determining eligible purchase orders. For example, it may combine minimum units with minimum spend or use multiple variables.

For example, a t-shirt supplier may have an MOQ of 100 for solid colour t-shirts but an MOQ of 150 for embossed t-shirts because of the additional time and labour required for the second option.

MOQ formula

Calculate your MOQ using the following formula:

Q=√2SD/H

Q= MOQ

S= Setup costs such as shipping and handling

D= Annual demand (in units)

H= Annual holding costs

How to calculate the minimum order quantity

Now that we understand what the MOQ is and its role in inventory management, and have a formula for calculating it, let’s look at the steps involved.

You will need to determine demand levels and holding costs, after which you calculate your break-even point. With these individual elements mapped out, you can develop your unique MOQ.

Determine demand

Review your most recent sales figures. Compare these figures with those from the same quarter in the previous financial year.

Calculate your break-even point

Evaluate your order history to identify your break-even point for every production run. This helps you determine your profitability point.

Understand your holding costs

Ensure that all relevant holding costs are applied appropriately, and include inventory and production costs, for example.

Develop your MOQ

Once you have determined demand, calculated your break-even point, and understood all holding costs, you can begin calculating your MOQ. Set the minimum profit margin you will accept for a specific product line on top of your break-even point. This becomes your MOQ for the product line.

Learn more on how to use Excel for your inventory management

Difference between minimum order quantity (MOQ) and economic order quantity (EOQ)

Your economic order quantity (EOQ) is a similar concept to the MOQ but with a key difference. The MOQ focuses on the minimum quantity required for an order, whereas the EOQ considers the optimal quantity. The optimal order quantity balances minimising costs incurred with maximising profit.

The EOQ formula is as follows:

Q=√2DK/H

Q= EOQ

D= Fixed costs per year

K= Demand in units per year

H= Carrying costs per unit per year

The benefits of MOQ

It’s important to understand that the advantages and disadvantages of MOQ vary depending on whether you are a supplier or a buyer.

Benefits of MOQ for suppliers

The MOQ is advantageous for suppliers because it can:

improve profit margins: suppliers can ensure a specified profitability ratio for each order
attract best-fit customers: suppliers can eliminate buyers who do not want or need the quantities they want to sell
improve inventory management: suppliers can gain increased control over inventory and reduce warehouse holding costs

Benefits of MOQ for buyers

The MOQ is advantageous for buyers because it can:

reduce cost-per-unit: buyers can receive the most cost-effective prices, increase their profits, and offer lower prices to customers
make prices negotiable: as unit prices are dependent on order size, the MOQ can help buyers negotiate with suppliers for more savings
support improved supply chain relationships: large orders placed frequently or consistently can mean more profitability, which improves or solidifies new business relationships

How QuickBooks can help you manage MOQ

Businesses with a range of products on offer can rely on the MOQ to drive profitability, manage inventory better, and solidify important business partnerships. However, every MOQ is unique to the business. An appropriate MOQ requires careful evaluation of a business’s unique model, arrangements, industry trends, and more.

With QuickBooks Online, not only can you set MOQs for your orders but you can also manage inventory, purchasing, distribution and more.

Key features include:

automatic stock updates: track all inventory in real-time
low stock alerts: get notifications when inventory runs low
customised inventory reports: generate reports to better understand best-selling and worst-selling products, the profitability of individual products, and specific selling trends

These features support more informed and quicker decision-making for businesses.

QuickBooks Online offers a robust plan with comprehensive inventory management features. Take it for a spin today with a free 30-day trial.

Learn more on how to add inventory to QuickBooks

Frequently Asked Questions

What is MOQ in the supply chain?

Can minimum order quantities be negotiated with suppliers?

How does a minimum order quantity impact inventory levels?

How do you find the minimum order quantity?

What is the difference between MOQ and EOQ?

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Minimum Order Quantity for Businesses: Improving Inventory Management

What is a minimum order quantity and how to calculate it

What is the minimum order quantity?

Types of MOQ

Low MOQ example

High MOQ example

Simple MOQ example

Complex MOQ example

MOQ formula

How to calculate the minimum order quantity

Determine demand

Calculate your break-even point

Understand your holding costs

Develop your MOQ

Difference between minimum order quantity (MOQ) and economic order quantity (EOQ)

The benefits of MOQ

Benefits of MOQ for suppliers

Benefits of MOQ for buyers

How QuickBooks can help you manage MOQ

Frequently Asked Questions

What is MOQ in the supply chain?

Can minimum order quantities be negotiated with suppliers?

How does a minimum order quantity impact inventory levels?

How do you find the minimum order quantity?

What is the difference between MOQ and EOQ?

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