What is MOQ (Minimum Order Quantity) ? How to calculate it ...

MOQ stands for Minimum Order Quantity. A minimum order quantity is the lowest requirement of units purchased at one time. MOQ is set either on the cost or ... hktdc.com | AboutHKTDC TREND MARKETS TIPS EVENTS COVID-19 Promoteyourbusiness Subscribe Menu TREND MARKETS TIPS EVENTS COVID-19 Promoteyourbusiness Subscribe Search Close WhatIsMinimumOrderQuantity?HowtoFindOutyourMOQin2021? Tableofcontent Introduction WhatisMinimumOrderQuantity(MOQ)? ProsandConsofMOQ Pros Cons UseofHavingaMOQ WhyDoSuppliersHaveMOQs? UnderstandtheimportanceofMOQwithanExample CanMinimumOrderQuantityChange? 4StepstoCalculateMinimumOrderQuantity(MOQ) 1.DetermineYourDemand 2.CalculatetheBreak-EvenPoint 3.UnderstandingYourHoldingCosts 4.ComingUpWithYourMOQ 4TipsonImplementingMinimumOrderQuantity(MOQ) 1.Calculatedemand 2.DetermineYourHoldingCosts 3.DetermineYourBreak-EvenPoint 4.DraftYourFormulaandStrategy FrequentlyAskedQuestions(FAQ) WhatIfYouDon’tNeedLargeStockQuantity? ShouldIStickWithaSupplierWhoOfferstheLowestMOQ? Conclusion Relatedposts: Introduction Everybusinessownerwouldwanttotakeineverybusinessopportunitythatcomesacross.Whowouldwanttoturnacustomeraway?Butthetruthis,noteverydealyoumakeissuitableforyourbusiness.Inretailingandsourcing,thisisespeciallytrue.Businesses–suppliers,manufacturers,orevenshopownersregardless–shouldmakecarefulconsiderationforhowmuchproducttoselltocustomers. Ontheonehand,sellingtoolittlecouldlosecapitalonholdingproducts.Ontheotherhand,turningawaycustomerswouldbemissedopportunitiesofmakingsmallbutprofitabledeals.Sohowdowestrikeabalance?ThisiswhyweneedaMinimumOrderQuantity(MOQ).AnMOQsetsthecutoffforthetotalamountyousellwith.Withafixedminimumrequirement,youcanmanagetheprofitmarginmoreeasilyornegotiatefurtheronothercosts. WhatisMinimumOrderQuantity(MOQ)? MOQstandsforMinimumOrderQuantity.Aminimumorderquantityisthelowestrequirementofunitspurchasedatonetime.MOQisseteitheronthecostoronunits.Thistechnicaltermisoftenusedbymanufacturersorsuppliersforaproductionrun.Ithelpsonlinesellerstodeterminetheleastamountofproducttheyarewillingtosupplyormanufactureinasingleorder.ExamplesofMOQ:MOQformanufacturers:IfamanufacturersetshisMOQas1,000units,thatmeansbuyersmustplaceanorderofatleast1,000unitsofinventoryatatime.MOQforwholesaleorretailpartnerships:ifabrandhasanMOQrequirement,thenthewholesaleorretailpartnerwillhavetoplaceanorderofatleast50unitsor$500worthofproducttobepurchasedtogether.Insomecases,suppliersareflexibleandcanchangetheMOQ.Incasesoflong-termpartnershipsbetweensuppliersandretailers,itislikelytohavenegotiationsonalteringMOQ.TherearenofixedrulesforMOQsorafixedMOQforall–everysupplierandbusinesstypemayhavedifferentsetups. ProsandConsofMOQ Pros Thebuyer’sbestuseofMOQistolockdownaunitatitsbestprice.Thepricescanbegreatlydiscountedonceaminimumorderquantityisagreedon.Thisaugmentsthemarginofprofitperunit. Cons MOQmayposechallengestosmallbusinessownersandretailers.AstheMOQsetsahigherrequirementtokickstartadeal,manyretailersmayhavetoorderunnecessaryunitstofulfiltheMOQ.Thiswoulddriveuptheupfrontcost. UseofHavingaMOQ WhydosupplierssetMOQ?Doesitnotmakeithardertodobusinessanddiscouragesretailerstogointonegotiationswiththem?Whatiftheretailerdemands90unitsandthesupplierinsistsonaMOQof100units?Isn’tMOQablockerinclosingadeal?Toanswerthequestion,wehavetolookatthematterfromthesuppliers’perspective. WhyDoSuppliersHaveMOQs? SuppliersoftensetMOQinfavourofsuppliers’productionplannings.MOQhelpssecurethatthesupplier’sproductioncostbeforerunningtheproductionandthattheminimumprofitswillbegenerated.Inmostcases,supplierssetoutaMOQwithallaccountingdonebeforehand.TheMOQcoverstheproductioncostandtheminimumunitsthesupplierneedstoselltomakeprofits.WithoutMOQ,thesuppliermayendupsellingfewerunits,whichwillresultinmonetaryloss.Somemanufacturersworkataverylow-profitmargin,particularlymanufacturersinChina.Ingeneral,Chinesemanufacturersclosedealsat3or4percentprofitmarginsforlargevolumeorders.FactorysizeisanotherfactortodecideMOQs,basingontheamounttheyproduceonasingleproductionrun.AnotherreasonforsettingupaMOQisthattheitemissometimestoocheaptobesoldinasingleunit. UnderstandtheimportanceofMOQwithanExample Hereisascenario:Let’ssayyouwantasuppliertoproduce500unitsinoneproduction.Thesupplierhasenoughresourcestoproduce1000unitsinonego,andsupplierswillthenwasteitsother500units. Themarginwouldalsovary.Ifitcoststhesupplier$70andhesells$100pertotalunitviawholesale–theywouldneedtosellallatoncetoearntheirprofits.Otherwise,itwouldtakemonthstoreachbreak-even. MinimumOrderQuantity(MOQ)ensuresthatthesesupplierswouldnotcarryanylosses.  CanMinimumOrderQuantityChange? MOQsingeneralaremeanttohelpsuppliersearntheirminimumprofits.SupplierscanbelenientinregardstoalteringtheMOQs(dependingonclients).Incertaincases,youcanbeconsideredaspecialclientbybuildingarelationship&engagingconversations,providinganadvantageofcomingupwithwin-winsituationsbetweenbothparties. TomeetMOQs,you’llneedtoshootanemailtothesupplier.Thefollowingexplainshowyoucandoitandgettheirlatestrates. Haveyourquantityrequirementslaidoutinordertoengageinamoredetailedconversationwiththesupplierinordertogetanunderstandingofyourneeds. Asmentioned,MOQsarenotuniversal.Theirratesvaryfromsuppliertosupplier.SearchingforsuppliersonvariousplatformscanwidenyouroptionsandlandononewithapreferableMOQ.CertainsupplierscansettheirMOQsinhundredsoreventhousands. Beingaverydiversemarket,youwillneeddedicationtofindingasupplierwhocanproducethenumberofgoodsyourequireatarelativelyaffordablepricethatsuitsyourneed.  4StepstoCalculateMinimumOrderQuantity(MOQ) ItisquitetrickytocalculateMOQssinceitdiffersdependingonthecontextandsituationofthebusiness.Whileit’sakeypartofinventorycontrol,thereisnosinglecorrectMOQorsecuredformulaicapproachforeverysituation. Eachbusinesswillhavetocalculatetheopportunitycostforpayinghigherper-unitcostsanddeterminewhethertheyshouldenforcehigherMOQs.Astheserequirementscanvary,asuppliermaysometimesconsidertheadvantagesoftakingsomeordersfromalosssinceitfuelshigher-profitorders. Asaresult,acustomisedMOQformulaforyourbusinesswillhavetobecreatedfromyourend.YouwillneedtodeterminewhentheMOQswillgeneratethemostprofitforyourbusinessusingextensivedatacollectionandanalysis. Howcanyoudothat?Thefollowingwillprovideyouwiththetipstoestablishyouruniqueformula. It’simportanttorememberthatthereisno“right”MOQ,withthedifferingandvariedsituationsamongstdifferentbusinesses.WhilethereisoftenatradeoffbetweenhavinghigherMOQsorpayinghigherpricesperunit,thereisn’tago-toformulatocalculateminimumorderquantity.  1.DetermineYourDemand Demandforecastswillrequireanunderstandingofproducttype,competition,seasonalimpact,andmanyotherfactorstoestimateunitsalesinthefuture.Formerchantspurchasinginventory,thisdatacanhelpinformyouofyournextpurchaseorder.Inventoryforecastingwillmatchsupply&demandintheequation. Findingtheminimumorderquantityyouwantfromamanufacturerisn’tfarfromwhatyouwillhavetosell.Youwillalsoneedtoaccountforthetotaltimelineofgettingtheinventoryreadyforshipping–suchasleadtimes,freighttransittimes,warehousereceivingwithyourthird-partylogisticsserviceprovider(3PL),andpotentialdelays.Youmayrealiseyouneedtoorderinventoryassoonaspossibleforcertaincases. Herearesomepointersonmonitoringdemand,especiallyduringstrenuoustimes:Maintainconstantcommunicationwithyoursupplier(s). Ensureyouhaveenoughstockincaseyoucannotmanageanylargefluctuationsindemand.Reviewsalesforecastweekly,ifnotdaily,toadjustproductionquantities.  2.CalculatetheBreak-EvenPoint Tosetyourminimumorderquantityinyourbestinterest,youmustfindoutwhatyourbreak-evenpointis.YouwillhavethefigurerightaftermakingthesecondtransactionforDTCorders.Usuallyrightwhenyourecoveryourcustomeracquisitioncosts,andyourcustomercomesbackthroughemailmarketingefforts. Asforwholesale,considerthelowestper-unitdollaryouarewillingtochargeinexchangeforahigher-ordervalue.Ifyou’renotpayingforsmallerquantitiesatahigherprice,thevaluecannotbesolowwhereyourprofitmarginsarenexttonothing–whilevolumediscountsareexpected.  3.UnderstandingYourHoldingCosts Certainproductshavemorestoragecosts:basedonsize,storagedurationandspecialwarehousingrequirements.Itcanhelpyoufinanciallywhenensuringthatsuchitemsarenotstoredininventoryfortoolong. Inventoryholdingcostisthetruecostofstoringallofyourproducts.Itissomethingyoushouldconsiderbeforeheavilyinvestingininventory.  4.ComingUpWithYourMOQ Considerthisscenario:let’ssayyouareconsistentlymaintainingahighdemand.Youwillneedtosellatleast150unitsperordertomakeprofits,butyourpartnerspurchaseabout200unitsperorderonaverage.Youcouldset200unitsperorderasyourminimumorderquantity(orevengodownto150),ifyourpartnersorclientshavebeenwillingtobuy200-unitordersfromthepast.  4TipsonImplementingMinimumOrderQuantity(MOQ) HerewehaveafewtipsthatwillhelpyougatherthenecessaryinformationtomakethecalculationsandcreateacustomizedMOQforyourbusiness. 1.Calculatedemand Understandthedemandforyourproducts.Demandforecastiscrucialinprojectinghowfast-movingyourproductisandhowmuchyoucanstockup.Makeforecastsbasedonproducttype,seasonaltrends,andcompetition.Factorinthelogisticsaswell,suchasshipmenttimes,leadtimes,freighttransittimes,andwarehousereceiving.Havingafiguretoaccuratelypredictinventoryquantityhelpsyourespondtofuturechangesfordemand,andalsoevaluatesalesforecastforfigureadjustment.  2.DetermineYourHoldingCosts Determiningwhatyourholdingorcarryingcostswillhelpyouunderstandthepriceyoupayforstoringgoods.Certainproductscostmoreforcarriage.Asanexample,therearegoodsthatrequirerefrigeration–meaningenergycosts,ascomparedtosomethingthatcansitonawarehouseshelfformonthsatroomtemperature. It’salwaysmoreprofitabletonotholdinventoryfortoolong,astherearecostsforinventorystorage.Thereareotherfactorssuchasproductsize,specialneedslikeenergyusage,timecostsforstorageandotherassociatedlabour&overheadcosts. 3.DetermineYourBreak-EvenPoint Aftergettingtheconceptofdemandandholdingcosts,youwillneedtodetermineyourbreak-evenpoint.Whatistheminimumnumberofproductsyoushouldselltorecovertheexpense?Let’ssayyousold5productstoacustomer.Howmuchwouldthatbringinrevenuecomparedtothecostsforkeepingthoseproductsininventory,carryingcostsandoverhead?Whatifyourorderwas200?Youwillneedtoeventuallyfindabreak-evenpointtoseehowthesalesrevenuecanexceedyourexpenseontheproduct.  4.DraftYourFormulaandStrategy AftergatheringallthedataanddeterminingwhatthesolidMOQwouldbe,youcanstartworkingontheformulaandstrategyforimplementation.ThisMOQformulawilldescribeeachproducttypefromyourinventory,andstrategizinglaysouthowyourteamcanincentiviseconsumerswhofallbelowtheMOQandhavethemincreasetheorderquantities. YouwillthenavoidunprofitableorderswhichfallbelowtheMOQsandminimisetheriskoflosingcustomers,havingaformulaandstrategyinmind. Ratherthanpushingtoincreaseaverageordervolume(AOV),providinganincentivelikebulk-buyingdiscountscanalleviatetheriskofunprofitablesales.Byhavingaminimumpurchaseamountsettocontrolyourrisks,itmakesitlesslikelyforcustomerstodipbelowyourprofitability.Pushingyourcustomerstoincreasetheirbuyscanbedonebyprovidingthemwithavaluableincentive. FrequentlyAskedQuestions(FAQ) WhatIfYouDon’tNeedLargeStockQuantity? Newbusinesseswouldoftenonlyrequiresmallernumberstogetmoving.Insuchcases,theywouldn’tbeabletoaffordMOQssetbymanufacturers.Tohandlethissituation,it’sbesttogetdirectcontactwiththemanufactureranddeliveranhoneststatementforanaffordableamountfromyourend. Ifyoucannotnegotiatetermsthatsuityourneeds,youwillhavetoconsiderdifferentsuppliersthatcomplementyourbusinessmodel. ManysuppliersareavailabletoofferlowMOQs.Theyjustneedeffortinfindingthem.Dependingontheindustryyou’reworkingin,investingtimetofindandplaceeffortsmaynotalwaysbeawisedecision.(Moreonthistopicbelow.)Ifyoudecidedonsomethingyouwanttopursue,itwouldrequireacommitmentforplentyofresearch.Goingthroughhktdc.comSourcing,TaoBao,andmanyotherdirectoriesofonlinesupplierscanprovideanenormousrangeofsearchingscope. Businessownersgenerallytakelessriskofpurchasingproductssincetheyneedthemoverbuyingheapsofgoodsupfront.Whilethisisnotonlyafinancialburdenforanyonenewtocommerce,youcannotguaranteethattheproductwillsell.  ShouldIStickWithaSupplierWhoOfferstheLowestMOQ? EvenifyouchooseacompanywiththelowestMOQ,whichseemstomakesense–itdoesn’tnecessarilymeanyouwillgetthemostvalueoutofit. Therearecertainkeyfactorsyoushouldconsider.Firstly,theidealsuppliershouldmeettheproductsafetyrequirementsspecifiedforyourniche.Secondly,youwantafactorythathasagreattrackrecordonfulfillingordersintime(SeeEcommercePlatformsformoreinformation).Thirdly,youwantasupplierwhocanprovideacustomersupportteamthatoffersapleasantservice. Moreimportantly,youwillwanttomaintainagoodrelationshipwithyoursuppliers.IfyoudrivetheirMOQreallydown,theirprofitswillbecut–leadingtounhappyanddisappointingoutcomesforthesuppliersastheylosemoney.Theyarealsofarlesslikelytoprioritiseproductionrunforyourcompany,especiallyiftheyhavehigher-payingclients.Naturally,businessrelationshipsarecrucial,anditisessentialtoavoidjeopardisingthem.  Conclusion Inanutshell,thereareafewkeyfactorstofindoutandimplementyourMOQs:FindoutthedemandforyourproductCrackthesweetspotof breakingevenAlwayslookintosalesforecastsanddiscusswithyoursuppliersonproductionquantities  Readmore:HowtoFindaManufacturerorSupplier Relatedposts: HowToFindManufacturersorSuppliersin2021 HowtoFindClothingManufacturersforYourBusinessin2021 ACompleteGuidetoProductSourcing:ProcessBreakdown,How-to&FoolproofTips UsingGoogleTrendsToFindTrendingProductsToSellOnlineIn2021 TIPS MinimumOrderQuantity,MOQ Share: Subscribe Getthelatestproducttrends,tradenewsandspecialoffersdeliveredtoyourmailbox! 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