When a business wants to make a profit, you want the supplier to give you that order or item at a minimum cost. To get that, the supplier or the manufacturer must ensure that it also accounts for their limitations and constraints. The more items in an order, the cheaper it is for the manufacturer to make.
If you want to find a perfect balance in this scenario, suppliers/manufacturers impose a minimum order quantity / MOQ on your order. So if you want to learn more about the MOQ meaning and its benefits, please continue reading.
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Part 1. What is Minimum Order Quantity (MOQ)?
Every supplier wants to make a profit in making a product because of different costs and constraints like material delivery, holding, electricity, etc. That’s why these suppliers will ask their clients to make an order with a minimum order quantity/ MOQ so they can offset these costs and constraints.
In some cases, when we want to know the MOQ meaning, the suppliers can also impose a minimum value on that order so that they can accept the contract. This allows the supplier to look at their profit margin and give you an estimated number of items to make it worthwhile.
Part 2. Benefits of Minimum Order Quantity
After understanding the MOQ meaning above, let’s discuss some of the benefits of ordering a minimum number for suppliers and businesses.
For Suppliers
Better Sales—A supplier can sell bulk items in a single order instead of slowly dispatching their product. This will help them increase their revenue and make substantial profits.
Lower Production Costs—With a minimum order quantity/ MOQ established, a supplier only has to bring in raw material once. Furthermore, they work on the task, finish the consignment, and stop the machinery. Both of these aspects reduce their operating and logistics costs significantly.
Efficient Fulfillment—When you have a minimum order quantity/ MOQ, you can make them all at the same time and pick and pack them in bulk. With larger batches, it is a lot cheaper to ship them to your customer.
Less Risk of Losses or Returns—Your customer will commit to the order if they follow the minimum order quantity/ MOQ requirement. In turn, a supplier has already made a profit for this order and will keep some in their inventory for the future.
Sales Forecasting—You can look at your customers and, with analytical data, make informed decisions and be ready for the next time they place an order.
For Retailers
Increased Loyalty—Your supplier now knows how much you will order each time and is more than welcome to commit to your order. They know that they are getting business, thus increasing profits.
Better Supply Chain – Once your supplier has ironed out all production issues by placing your order, they will be faster the next time you place an order. You can enhance your supply chain because they can make it faster this time.
Better Profits—If your product is selling, you can increase the minimum order quantity/ MOQ each time. With increased orders, you will get the items cheaper, thus gaining better profits.
Increased Fulfilment—Especially during holiday seasons or festivals, you can make much bigger orders, allowing you, as a business, to focus on fulfillment. The better delivery your customers get, the better their experience will be.
More Bargaining Power—A higher minimum order quantity/ MOQ allows you to demand more, such as better quality and speedy delivery. You can also get extra benefits for the same MOQ price.
Bulk Purchases—You can provide value to your customers by having sufficient inventory that is ready to ship.
Part 3. How to Calculate Minimum Order Quantity?
Many factors can define MOQ and the costs it will incur. For example, the supplier needs to make a profit, stay in business, gather raw materials, and labor costs, etc., will come into play. Furthermore, fluctuating raw material prices are a big aspect of varying MOQ prices.
With these things in mind, the following is the most common factors approach to judging how you can calculate your minimum order quantity/ MOQ.
1. Consider Your Demand
See to your historical demand for your product. So, if the demand is for 500 items, you can order a minimum order quantity/ MOQ of 600-700 to keep some items in reserve. Ordering a minimum of 5,000 is not feasible. Season demands are a big factor here, so consider it well.
2. Holding Costs Considerations
Do you have a 3PL supplier’s warehouse where you can hold your consignment, and how much do they cost? Furthermore, you may also want the items stored in the supplier’s warehouse if it is cheaper.
The holding cost can also change or increase significantly for items that need special considerations. For example, your order needs refrigerated storage or is of an odd shape that it cannot be stacked conventionally. furthermore
3. Break Even Point
When considering minimum order quantity/ MOQ, a supplier will consider the break-even point from where they start making profits. Sometimes, to keep a good customer, they will run on minimum profit margins and may later also accept larger orders.
4. Setting Your MOQ
You can reach the sweet spot based on your demand and the supplier’s minimum order quantity/ MOQ. To save more, you can order a bit higher than the MOQ. Paying in installments or setting a carrying fee can also enhance your costs.
5. Creating a Strategy
Now, with the above steps, you can calculate your optimal minimum order quantity/ MOQ. You need your long-term strategy to agree on the MOQ price. So, the MOQ can usually vary from item to item or product range to product range.
You need to negotiate for the optimal value to implement your strategy. You also need to involve the supply chain management people in the decision-making. Based on your financial goals for the coming fiscal year, you can increase or decrease the optimal MOQ number.
Part 4. How does Minimum Order Quantity Impact Inventory?
No matter the minimum order quantity/ MOQ number, the supplier and the retailer must manage their inventory. This includes the delivery fee and warehouse holding. The following are some aspects that impact inventory due to MOQs.
High MOQ
When considering your demand, you need a higher MOQ to fulfill it properly and promptly. You cannot take an order and take downtime to facilitate the requirements for that order. Now, a higher MOQ does impact the working capital for that duration, and you need ample space in your warehouse to keep up with demand.
This does help lower other costs, like ordering more raw materials for your inventory. It also reduces the required management for the inflow and outflow of materials and products. It is pretty easy to see that you gain bulk savings from higher MOQ.
If you make more than the MOQ, there is a minimal chance of the stock becoming obsolete, as your customer might not want to deliver the same good again.
Low MOQ
Lower MOQ orders will significantly reduce your costs, but they also allow you to free up more space for your inventory and keep diverse orders. Furthermore, the lower the number of MOQs, the higher the turnover you can make, thus inviting more business.
Unfortunately, it also strains your salespeople because now they have to look for more business and may need to keep more customers interested. This will cause your business to sustain higher overhead charges because the administration is working round the clock to keep up with smaller orders.
Raw Material
The amount of raw material to make your products will fluctuate based on the MOQ amount. Most raw materials require special inventory considerations that can increase costs as well. Keep in mind that you need to consider ordering and delivering costs for these materials too.
Conclusion
Consider bringing in experts if you are more informed about calculating and managing your minimum order quantity/ MOQ. A professional logistics company can help you manage all your deliveries and store essential items at crucial locations. You can focus more on getting business, negotiating with your customers, and letting experts work for you at better rates.
Hiring an extremely professional company like NextSmartShip is much cheaper than managing your holdings. This will also help you ship your products in a timely manner, as NextSmartShip has warehouses around the world and works on highly efficient routes.We recommend visiting NextSmartShip today and see why their rates are the best and will help you realize the growth of your dreams.
