What MOQ stands for and how it works
MOQ stands for “minimum order quantity,” a factor that plays into business inventory ordering decisions. Suppliers set MOQs to ensure their production and shipping costs are covered, and that they generate profit.
Buyers often only want to purchase the amount of product they need, so they don’t hold onto the excess stock. However, a buyer’s needs differ from the supplier’s needs, and MOQs are established so suppliers aren’t being taken advantage of.
What is minimum order quantity?
MOQ is the smallest amount of product a supplier is willing to sell per order. In calculating MOQ to generate profit, a supplier must calculate all their expenses, like production, inventory cost, shipping cost, and manufacturing. For example, if a business has a MOQ of 100 units, buyers must purchase a minimum quantity of 100 units for a purchase order. Taking that total cost into account, a MOQ is established to ensure the supplier will make a profit.
Every supplier’s MOQ will be different, based on their costs. The goal is to attract a small amount of buyers who want to purchase large amounts of inventory, instead of a large amount of buyers purchasing small amounts of inventory.
Why do suppliers use MOQ?
Wholesale suppliers benefit from a phenomenon called economies of scale. This happens when the average cost per unit decreases, while the number of actual units increases. For example, it’s less costly to print thousands of newspapers on a printing press than it is to print just one paper.
Suppliers also use MOQs to offset their manufacturer’s MOQs. Since manufacturers produce items in a large quantity, suppliers have to buy their materials that way as well.
MOQs can help operations become efficient. If suppliers don’t set a MOQ, they risk increasing expenses, instead of profits, since buyers like to order according to their inventory needs. By establishing a profit margin and healthy cash flow, MOQs can help create peace of mind for wholesale employers.
Tips for buyers on handling MOQs
Buyers have their own inventory needs to look after. Using the economic order quantity (EOQ) method, a business can determine how much inventory to purchase given a set cost of production, demand, and holding.
However, if they want to order less of a specific product type than the supplier’s MOQ, they’ll need to engage in tactics to work out deals with the suppliers.
Shop around for suppliers
Different suppliers may set their MOQs lower than their competition, in order to attract customers. It’s important to see other possible offers before making a decision. When choosing a supplier, be sure to:
- Research each supplier thoroughly to ensure they are verified and trustworthy
- Ensure they can handle inventory needs
- And read testimonials or reviews from past customers
MOQs are not a one size fits all deal, and in a competitive market, there could be many options to choose from.
Negotiating a new MOQ
A supplier may be willing to reduce their MOQ slightly if it means retaining clientele. They are a business, after all. If there is a relationship established, a negotiation could occur to make both parties happy. A few negotiating tactics are:
- Find an alternative, lower-quality material to drive production down
- Ask to receive half the inventory now and the rest at a later date
- Offer to pay for other fees for fewer products
- Use crowdfunding to presell a large number of products to cover the MOQ
- Use one company’s prices against another, called price matching
It’s important to tread lightly when negotiating, since a lower MOQ could cause lower quality production and cut profit.
Explore alternatives to MOQ
New supply chain techniques may allow businesses to sidestep more traditional operating costs, like MOQs, including:
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Minimum purchase amount focuses on prices instead of units. This can help forecast revenue, since there is a guaranteed minimum price for every purchase order.
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Minimum per product focuses on the individual product instead of the whole order. This can help specific items that need to be sold in large quantities to be profitable.
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Drop-shipping is a method in which the retailer does not hold the product; rather, they transfer the purchase order to the manufacturer, who then ships it to the customer.
Embrace the MOQ
Often, MOQs are the cost of doing business and are non-negotiable. Instead, buyers should focus on creating an effective production line around a set MOQ. That way, partnerships can remain profitable and buyers and sellers can operate efficiently.
While they may be frustrating, MOQs are put in place for good reason. Suppliers need to cover the costs of their business, as well. Luckily there are other avenues that buyers can take to try mitigating the MOQ cost.