For manufacturers, suppliers, and retailers pursuing growth, handling inventory management is of the utmost importance.
A delicate balance must be maintained between holding too much inventory and overpaying on holding costs and not having enough to cover consumer demand.
Minimum order quantity (MOQ) is one tool used by both suppliers and retailers alike to determine the optimal quantities of products and materials to buy and sell.
MOQ meaning: What is MOQ?
Minimum order quantity (MOQ) is an acronym you’ve surely come across when dealing with wholesale suppliers on eCommerce sites like Alibaba, Amazon, or AliExpress. MOQ is the minimum number of units of a single SKU that a buyer must purchase for a seller to fulfill an order.
Suppliers put MOQ requirements in place to make sure they maintain a minimum amount of profit margin on each sale.
MOQs help to offset setup costs such as raw materials, labor, and shipping. By spreading these costs across a large quantity of units, businesses can achieve economies of scale.
This means that your supplier can pass on better prices to you, who can pass on better prices to the end consumer. Everyone wins.
Keep in mind that different suppliers will have different MOQs—even for identical products. This is because each supplier is geographically unique and will have their own unique setup costs, management structure, business model, etc.
The benefits and considerations of MOQ
There are advantages and disadvantages of minimum order quantities for both parties involved in the purchase.
Pros for sellers
- Improved profit margins: MOQs enable the supplier to make sure a specified profitability ratio is in place for each order.
- Attracts best-fit customers: MOQs help eliminate buyers who do not want or need the quantities of product you want to sell.
- Better inventory management: MOQs let the supplier to have increased control of inventory and reduce warehouse holding costs.
Considerations for sellers
However, keep in mind the barrier to entry created by MOQs can cost you valuable sales with small businesses. Plus, even large corporations will often use test orders (in small quantities) to get a feel for working with a new supplier.
If you can’t afford to turn away customers at this stage of your company’s development, don’t set MOQs.
Pros for buyers
- Reduced cost-per-unit: Buyers can receive the most cost-effective unit prices, increase profits, and offer lower prices to their customers.
- Makes prices negotiable: Because unit prices are dependent on order size, MOQs open the door for buyers to negotiate with suppliers for added savings.
- Helps build relationships with suppliers: Large, frequent orders and working together to achieve profitability can open the door to heightened business relationships.
Considerations for buyers
For buyers, purchasing from a supplier with high MOQs will require higher upfront costs. Plus, you may have to keep inventory on hand that you don’t need, increasing your monthly costs as a result.
What are the different types of MOQ?
There are two ways MOQs are categorized: by size and by complexity. low MOQ and high MOQ are categorizations of size, while simple MOQ and complex MOQ are categorizations of complication.
Low MOQ
A low MOQ is a small quantity of units, typically in the 1–50 range. Low MOQs are indicative of startups, companies that don’t need to carry large amounts of inventory on hand, or businesses that use the just-in-time (JIT) inventory management system.
While small orders can save on upfront costs, a lower MOQ is not inherently a good thing. This could mean, for example, that a lumber or fabric supplier is using lower-quality materials.
If a supplier offers a low MOQ, it is wise to investigate how they can afford to sell this quantity while maintaining profitability.
High MOQ
There is no strict number of units attached to high MOQs, but these tend to be quantities high enough to weed out smaller players from making purchases.
While high minimum order requirements can seem burdensome, they come with several distinct advantages. High MOQs provide the best price-per-unit. This means the greatest possible savings can be passed on to your customers. It also means that the supplier’s sales teams have less sales to fulfill, reducing administrative overhead costs.
Simple MOQ
Simple MOQ is just as it sounds: simple. A simple MOQ is one MOQ that uses only a single factor. For example, a T-shirt supplier with an MOQ of 100 units. Simple MOQ can also come in the form of order value (dollar amount) as opposed to minimum units ordered.
Complex MOQ
On the other hand, complex MOQ takes two or more factors into consideration when determining eligible purchase orders. This could be a combination of minimum units with minimum spend, or it could be MOQs are based on multiple variables.
For example, the same T-shirt supplier above may have an MOQ of 100 for solid-color T-shirts, but 150 for tie-dye shirts due to the additional labor costs required to produce the latter.
How to calculate MOQ
Suppliers should calculate a unique MOQ for each individual product sold, since each item will have its own cost of production, raw materials needed, etc. Here is how to calculate MOQ:
- Determine your profitability point: Evaluate your order history to identify your break-even point for each production run. Be sure to include inventory costs and cost of production (if applicable).
- Forecast demand: Review sales figures from the most recent similar period. For example, the same quarter of the previous fiscal year. If you are a relatively new company or are offering a new product with thin demand history, consult our guide to demand forecasting.
- Calculate MOQ: Next, set the minimum profit margin you are willing to accept on top of your break-even point. This is your MOQ for that product line.
MOQ vs. EOQ
EOQ is the optimal (not minimum) number of units a company seeks to purchase from a supplier or manufacturer to achieve the minimum amount of costs and the maximum amount of profit.
Economic order quantity (EOQ) is a similar concept to MOQ. However, EOQ is best thought of as the buy-side equation, while MOQ is the sell-side.
A company’s EOQ can be calculated using the following formula:
Q=√2SD/H
- Q = EOQ
- S = Setup costs, such as shipping and handling (per order)
- D = Annual demand (in units)
- H = Annual holding costs
Ideally, a buyer’s EOQ will fall above the seller’s MOQ so that the transaction can take place without the need for negotiation.
How QuickBooks can help you manage MOQ
Businesses owners throughout the supply chain use MOQs to drive profitability, manage inventory, and find business relationships best suited to their needs. Determining the ideal MOQ for your business requires thoughtful understanding of your sources of demand and market trends.
To ensure you always have the most up-to-the-minute data and analytics informing your inventory management and accounting procedures, consider an integrated inventory management solution like QuickBooks.
With QuickBooks Online Advanced, you can set MOQs for B2B sales orders, as well as manage inventory, purchasing, distribution, and more. Discover all the features of QuickBooks Online Advanced with a free 30-day trial.
