MOQ stands for Minimum Order Quantity: the smallest quantity of goods a business is willing to sell to a customer while maintaining revenue efficiencies and margins. This article explores what MOQ means, how to calculate the optimal MOQ for your products, and why it matters for different contexts.
What does MOQ mean?
MOQ means Minimum Order Quantity. The Minimum Order Quantity for a product is the lowest number of units a supplier is willing to sell. An MOQ can be set as a cost or a quantity - for example a Minimum Order Quantity might be either $10,000 worth of milk, or 1,000 litres of milk, depending on the supplier's preferences.
A business's Minimum Order Quantity for each product is typically determined through analysis of profit margins, operational efficiencies, and manufacturing requirements. The purpose of setting an MOQ is to ensure that all customer orders are worth the time and cost required to fulfil them.
Setting a Minimum Order Quantity (MOQ) helps ensure cashflow and profitability targets are met.
The difference between high and low Minimum Order Quantities
A high MOQ means the business sells a product in relatively large quantities. A high MOQ might indicate:
- The product has a low profit margin. When profit margins are low, goods need to be sold in large quantities to generate sufficient revenue for the supplier.
- Shipment costs for that item are relatively high. For example where the supplier pays delivery costs, they may have flat fee structures per truckload or container so that they need to fill the space available in order to remain profitable.
- Customer acquisition costs are high, which can erode profitability unless a high minimum order quantity is set.
- Production costs are high. For example an expensive or time-consuming assembly line set-up adds overall manufacturing costs, which in turn lowers profit margins. Again this can lead to a high Minimum Order Quantity being set.
- Administrative costs are high. While higher administrative costs aren't necessarily reflected in the Cost of Cogs Sold metric, which feeds in to the profit margin calculation, they still ultimately affect a company's Profit and Loss statement, and can be countered somewhat via a higher minimum order quantity.
- Inventory costs are high. When holding costs are high companies are motivated to shift as much inventory as possible. The less inventory a business holds, the lower their overall holding costs will be – so setting a higher Minimum Order Quantity, and/or offering bulk buying discounts to existing customers can be a way to manage inventory costs by improving inventory turnover.
A low MOQ means a supplier or manufacturer is able to offer smaller batches of its product to customers while still able to make sufficient profit margin on that batch to make it worth the time, cost, and effort to produce. A business may set a low minimum order quantity – or none at all – when:
- The business operates on a make-to-order basis, for example creating high-value custom-built products
- Profit margins are sufficiently high to allow for a low MOQ.
- Their own supplier's minimum order quantity is sufficiently low.
- Costs in the supply chain – such as transport fees – are low enough that small orders can be profitably shipped.
- The business operates on a D2C model. Direct to consumer orders, for example sales made by ecommerce businesses, are not typically subject to MOQs.
- Overall costs are low. A business with lower administrative costs and/or low production costs is likely to be able to afford a low MOQ. However it's worth noting that when cost efficiencies are gained through economies of scale – with high production outputs – the larger inventory requirements tie up cash flow and incur higher holding costs. This may limit the ability to maintain a lower MOQ.
MOQ meaning in supply chain
MOQs play an important role in manufacturing and supply chain management. A minimum order quantity functions as a safety net for your profit margins and can help inform key decisions around production and purchasing.
Here are some ways an MOQ impacts the supply chain:
- Supplier relationships: Clear communication of MOQs between suppliers and customers along the supply chain helps form better relationships and facilitates better supply planning. An MOQ can also function as a negotiation tactic, wherein loyal customers are rewarded with reduced MOQ figures.
- Maintaining cost efficiencies: Ordering stock at or above your MOQ levels is cost-effective. Allowing product numbers to drop below the MOQ means you risk being left with waste or underpriced goods.
- Batch production: A predetermined MOQ is common for batch production tasks. Often the order or production will use the MOQ as its unit number, as this is the key indicator for production efficiency.
- Inventory forecasting: Keeping accurate MOQs makes it easier to forecast demand, as you have clarity as to what is coming down the line and how you may need to adjust your strategy to prepare for future sales.
How to calculate Minimum Order Quantity
There's no one-size-fits-all formula for calculating MOQ. This is because the number of variables that determine the optimal sales volume for a given product is never fixed. For instance, your shipping carrier may have pricing tiers that greatly impact how much profit you can make on a certain volume of goods.
While these variables make it impossible to maintain an industry-wide standard, there is one formula that seems to be popular among many companies for determining MOQ.
The common way to calculate MOQ is:
Total Cost of Order / Unit Cost of Product = Minimum Order Quantity
However, remember that the optimal MOQ formula is generally far more complicated than this. You need to consider data points that can vary, such as customer demand, supplier costs, and production capacity. Consider using the economic order quantity (EOQ) formula to determine your optimal reorder levels. Then let this data inform the levels you set for your MOQs.
The EOQ formula is:
√(2DK/H) = Economic Order Quantity
In this formula, figures are represented as follows:
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D = Number of units purchased per year
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K = Order cost per purchase order
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H = Annual holding cost per unit
Why manufacturers and wholesalers should care about MOQ
MOQ is a data point that directly affects a manufacturing or wholesaling business's profitability and stability. It also affects supplier and customer relationships. Let's take a quick look at the two biggest impacts MOQ can have on these business models.
Cost efficiency
Cost efficiency is central to maintaining an MOQ. Knowing the bottom line for your businesses in terms of cost efficiencies allows you to make smart, responsible decisions around economies of scale with orders, expenditures, and deliveries to customers.
Profitability
Another vital reason why you should maintain an accurate MOQ is to ensure the profitability of the business. If you don't have an MOQ in place, you could be ordering too much of one good and not enough of another. A miscalculated MOQ can eat into the profitability of the business.
Why purchasers should care about MOQ
It's not just business owners who should care about MOQ. Purchasing officers should care about MOQs because they affect how much of each unit or product they purchase, and at what cost. In turn, this affects their budgets and informs their procurement strategy.
Three main reasons why purchasers ought to care about MOQs:
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Cost and budget: Being aware of the MOQ means a purchaser can better manage their budgets, cash flow, and forecasting. Knowing when or if to buy in greater quantities − whether to minimise initial cash outlay or prepare for future demand − is a key part of any purchasing decision.
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Planning: Being able to buy in bulk enables the procurement manager to align purchasing decisions with the broader strategic aims of the business.
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Availability of items: A business needs to adhere to its MOQ needs to meet customer demand. If there are flaws in the MOQ calculations, a customer may miss out on the product they need and the business may miss out on that sale.
MOQ and inventory management
Minimum order quantities directly impacts inventory management because it contributes to the cost-effective flow of goods, materials, and parts. The quantities at which goods are bought and sold impacts storage costs and fulfilment times in addition to budget and forecasting.
Supplier negotiations
Your business's relationship with suppliers is hugely valuable; a good relationship means you will be able to negotiate in good faith and will be looked after during times of business volatility.
Maintaining MOQs and communicating well when these change means the relationship remains positive and fruitful for the business. Remember, your supplier will also have MOQs, so you'll need to purchase enough product to meet their requirements too.
Warehousing management
MOQ is important when figuring out how much inventory you should hold. You want exactly the right amount of stock, in MOQ batches, to be able to meet customer demand where possible.
Getting inventory levels right contributes to cost savings and, ultimately, profit.
Customer offerings
Optimal MOQs mean you always have enough product on hand to deliver to customers. This ensures lead times and deliveries are efficient and customers are satisfied. In turn, this contributes to a positive reputation and brand awareness.
Optimising MOQ with inventory management software
The process of setting minimum order quantities can be optimised with automated inventory management software. By collecting data across sales, inventory, and purchasing you can easily determine the optimal stock levels for each of your products.
Inventory management software automates this data collection process, providing clear results by way of easy-to-read dashboards. You can then take your findings and use them to determine optimal MOQ levels for each SKU.
Factors affecting MOQ: How to determine optimal levels
Figuring out the right MOQ for each product can be a complex task. There are a huge number of variables to consider, which in turn can also fluctuate and change.
Here are the main factors affecting MOQ:
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Data collection: An accurate historical record of the goods moving in and out of your business is essential to understanding where your MOQs should sit. If you haven't got access to this data yet, start tracking immediately and reassess your levels after a few months.
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Supplier costs: You should have a clear idea of the costs of the materials, parts, and products you need to make sales. This includes procurement, labour, and shipping costs.
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Warehousing costs: The cost of holding stock, including warehousing, labour, and insurance, impacts profitability and fulfilment capacity and should therefore play a part in determining MOQ levels.
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Customer demand: Considering at what level customers will buy is key too. There's no point in having an MOQ which is so far above the number that customers want that a batch will never sell.
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Product cost fluctuations: Costs can change and fluctuate for a number of reasons, including suppliers strategically changing their own MOQ limits, and facing higher or lower cost structures internally.
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External factors such as extreme weather: The greater world will always have an impact on supply and demand. Just look back a few years at how recent natural disasters and disease brought many supply lines to a standstill.
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Technology: The systems and tools we use to manage supply chains and forecast sales are always improving. Install the most contemporary systems, as permitted by your budget, to ensure the data informing your MOQs is accurate.
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Regulatory changes: Shifts in regulation and legislation will also affect MOQs. For example, an increase in the minimum wage or rapid inflation can impact the quantities you and your customers can afford to purchase.
Minimum order quantity examples
While MOQ is widely used across all businesses, there are certain industries in which it is more heavily relied upon than others. Let's look at a few common examples where you'll find MOQs:
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The clothing industry: Custom clothing, such as branded shirts or hats, requires a certain amount of effort to design and produce. This effort is often not worth its cost for a single unit, and so MOQs are frequently established in clothing sector.
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The food sector: To make the most economical use of its facilities, a food production business will often require orders over a certain size. Consider how uneconomical it would be to use a commercial oven to produce a single Twinkie, or to grow a single carrot for one customer.
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The cosmetics industry: Formulating a particular colour or type of makeup requires investment, in time and cost. As such, a beauty industry manufacturer may have an MOQ that guarantees against lost profits.
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