How to Make a Minimum Order Quantity Work for Your Business

Minimum order quantity, or minimum order amount, is the smallest amount of inventory that you can purchase from a supplier. Typically, non- ... Thisdeviceistoosmall Ifyou'reonaGalaxyFold,considerunfoldingyourphoneorviewingitinfullscreentobestoptimizeyourexperience. Skiptomaincontent EditorialDisclosure Wehavenotreviewedallavailableproductsoroffers.Compensationmayimpacttheorderofwhichoffersappearonpage,butoureditorialopinionsandratingsarenotinfluencedbycompensation. 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ReadtheLatestonPersonalLoans SmallBusiness SmallBusiness SoftwareOverview PayrollSoftware AccountingSoftware E-CommerceSoftware ProjectManagementSoftware TopReviews Monday.comReview OnPayReview QuickbooksOnlineReview SproutSocialReview Knowledge HowtoWriteaProjectProposal 10MessagingAlternatives BestPayrollServicesforSmallBusiness HowtoStartanOnlineBusiness Knowledge Knowledge Knowledge AllArticles CreditCardArticles BankingArticles BrokerageArticles CryptocurrencyArticles InsuranceArticles MortgageArticles PersonalFinanceArticles PersonalLoanArticles RecentArticles personalfinance GetReadyfortheAmazonPrimeEarlyAccessSale2022,aNewTwo-DaySale insurancelife 4LifeInsuranceTipsFromSuzeOrmanDuringLifeInsuranceAwarenessMonth personalfinance HowtoRecoverFinanciallyAfterHurricaneIan mortgages 2ProsandConsofBuyingaForeclosedHome SearchIcon Clickheretosearch SearchIcon Clickheretosearch SearchFor TheAscent Knowledge InventoryManagement HowtoMakeaMinimumOrderQuantityWorkforYourBusiness byDPTaylor| UpdatedAug.5,2022-FirstpublishedonMay18,2022 Manyoralloftheproductsherearefromourpartnersthatpayusacommission.It’showwemakemoney.Butoureditorialintegrityensuresourexperts’opinionsaren’tinfluencedbycompensation.Termsmayapplytoofferslistedonthispage. Imagesource:GettyImages Abusinessmustknowitsminimumorderquantity(MOQ)orrisklosingprofitsbyturningawaytoomanycustomersorsellingataloss.Thisguidewillhelpyoudetermineyourownformula. Asabusinessowner,you’retemptedtosay“yes”toeverycustomerwhowantstobuyfromyou.Whywouldyouturndownmoney?Buttherealityisthat,forsomecompanies,notallsalesaregoodforyourbusiness.Especiallyintheretailworld,businesseshavetomakecarefuldecisionsabouthowmuchproducttheyselltocustomers.That’sbecausesellingtoolittlecouldresultintakinglossesonordersduetotheinventorycostsofholdingthoseproducts.Ontheotherhand,youdon’twanttoturnawaytoomanycustomers.Yes,theirpurchasesareusuallysmall,buttheymaystillbeprofitableatacertainpoint.Sohowdoyoufindthatsweetspot?That’swhereminimumorderquantity(MOQ)comesin.AnMOQwilltellyouexactlywhatthecutoffisintermsofthetotalquantityyousellwitheachorder.Withthisnumberinmind,you’llbeabletoconfidentlyacceptorturndownorders,knowingthatyou’remakingthemostprofitabledecisioneachtime.Overview:Whatisminimumorderquantity(MOQ)?Minimumorderquantity,orminimumorderamount,isthesmallestamountofinventorythatyoucanpurchasefromasupplier.Typically,non-retailcustomerswillwanttoordersmallerquantitiesfromthesupplier,andthesuppliermustcarefullycalculatetheirMOQtomakesurethatthey’renotsellingataloss.Atthesametime,thesuppliermustmaximizethenumberofcustomerstheycanselltowhodon’twanttobulk-orderlargequantitiesofgoods.TheMOQillustratesthecostefficiencyinventorymanagementchallengesasupplierfaces.TheMOQmustcovertheprocessingandexecutioncostsofthetransaction,suchaslabor,shipping,administrative,andotheroverheadcosts.ThestakesarehighforthesupplierwhenitcomestosettingtheirMOQ.Iftheysetittoohigh,theyrisklosingoutoncustomerswhowouldotherwisebeprofitable.Andifit’salowMOQ,theyrisktakingalossonorders.Asaresult,it’scriticalthatasuppliercorrectlycalculatetherightMOQ.AnABCanalysismayalsohelpmakethisdetermination--thesupplierplacesahigherpriorityonproductsthathavehigherprofitability,andtheMOQcanbelowerfortheseitems.HowtocalculateaminimumorderquantityCalculatinganMOQisakeypartofinventorycontrol,butit’strickybecauseitdifferswitheverybusinessandeverysituation.There’snosinglecorrectMOQorfixedformulaicapproachtotheproblem.Therequirementsvarybybusiness,andeachfirmmustcalculatetheopportunitycostbetweenpayingahigherper-unitcostandenforcingahigherMOQ.Sometimes,asuppliermayconsideritadvantageoustotakesomeordersatalossbecauseithelpsfuelordersofhigher-profititems.Consequently,youmustcomeupwithyourownspecial,customizedMOQformulaforyourbusiness.YoumustcreateitbycollectingextensivedataandthenbreakingdownthenumberstodetermineatwhatpointtheMOQismakingyourfirmthemostmoney.Howdoyoudothat?Followthetipsbelowtocreateyouruniqueformula.5tipstoimplementaminimumorderquantityThefollowingfivetipswillhelpyougathertheinformationandmakethecalculationsnecessarytocreateacustomizedMOQforyourbusiness.1.CalculatedemandTodetermineyourMOQ,youmustunderstandthedemandforproductsinyourbusiness.Implementdemandforecastingbasedonproducttype,seasonality,andcompetition,andconsiderfactorssuchasinventoryshiptimes,leadtimes,freighttransittimes,andwarehousereceiving.Comeupwithafigurethataccuratelyconveyshowmuchinventoryyoumusthaveonhandtorespondtochangesindemand,andassesssalesforecastsconstantlytoadjustthisfigure.Hypotheticalexample:ACMEWidgetsInc.hasdeterminedthatonaveragetheysell10,000widgetsperquarter,buttheirbusinessishighlyseasonal.Theysell5,000inthewinter,7,500inthespring,15,000inthesummer,and12,500inthefall.Theaveragewidgettakestwoweekstoshipandspendseightweeksinthewarehouse.2.DetermineholdingcostsNext,determinewhatyourholdingorcarryingcostsare,whichisthepriceyoupayforstoringgoods.Someproductscostmoretocarrythanothers.Forexample,goodsthatrequirerefrigerationmeanenergycosts,whilesomethingelsecansitonawarehouseshelfformonthsatroomtemperature.Regardlessofhowmuchitcoststostoretheinventory,it’salwaysmoreprofitabletonotholdinventoryfortoolong.Factorinthesizeoftheproduct,anyspecialneeds(suchasenergyusage),howmuchtimeitspendsinstorage,andassociatedlaborandoverheadcosts.Hypotheticalexample:Afteradetailedanalysis,ACMEWidgetsInc.hasdeterminedthatitspends$125,000onholdingcoststocarry$500,000ininventory,resultinginholdingcostsof25%.3.Determinebreak-evenpointNowthatyouunderstanddemandandholdingcosts,youmustdetermineyourbreak-evenpoint.Whatistheminimumnumberofproductsyoumustselltorecoverwhatyouspenttoacquirethem?Ifyousoldfiveproductstoacustomer,howmuchrevenuewouldthatbringincomparedtohowmuchitwouldcosttokeepthoseproductsininventory--carryingcosts,overhead,andanyotherexpenses?Whatiftheorderwere100?Eventually,youwillfindabreak-evenpointwheretherevenueofthesaleexceedshowmuchyouspentontheproducts.Hypotheticalexample:Basedonhowmuchproducttheymusthaveininventoryatonetime,howmuchitcoststokeepwidgetsforeightweeksinthewarehouse,shippingcosts,etc.,ACMEWidgetsInc.hasdeterminedthatacustomermustorderatleast350widgetsforittobeaprofitablesale.4.DraftaformulaandastrategyNowthatyou’vegatheredallthedataanddeterminedwhatasolidMOQlookslike,youcandrawupaformulaandastrategyforimplementingit.ThisformulawilldescribetheMOQforeachproducttypeinyourinventory,andthestrategywilllayouthowyourteamwillincentivizecustomerswhofallbelowtheMOQtogetthemtoincreasetheirorderquantities.Withaformulaandastrategyinplace,youwillavoidunprofitableordersthatfallbelowtheMOQwhileminimizingthelossofcustomersintheprocess.Proactivelyavoidtheriskofunprofitablesalesbyworkingtoincreasetheaverageordervolume(AOV),perhapsthroughincentivessuchasbulk-buyingdiscounts.Thismakesitlesslikelythatcustomerswillmakeapurchasethatdipsbelowprofitability.Haveaminimumpurchaseamountinplacetocontrolrisk,butpushcustomerstoincreasetheirbuysbyconsideringwhatyoucandotoincentivizethem.Hypotheticalexample:ACMEWidgetsInc.foundthatitmustsell350widgetstobeprofitable,butsometimescustomersweretryingtoorder300.Insteadofsimplyturningthemaway,ACMEpointedouttothesecustomersthattheywouldbebackinthreemonthstopurchaseanother300.So,byplacinganorderfor600now,theycouldhavethefirstshipmentsentimmediatelyandthesecondatadateoftheirchoosing--withfreeshippingtoincentivizethelargerorder.SoftwareisnecessarytodetermineanMOQIt'sunwisetotrycalculatinganaccurateMOQwithpenandpaper,physicalinventorycounting,orasimpleExcelspreadsheet.Today'sinventorymanagementsoftwareplatformsarecapableofgatheringalloftheessentialdata,suchasinventoryshrinkage,shippingcosts,andturnoverratio.ThebestnextstepyoucantakeistoreviewthetopsoftwareoptionsavailableandtryafewofthemoutsoyoucanbegintheprocessofcomingupwithanMOQthatwillincreaseyourcompany'sprofitability.Theseplatformshaveadditionalfeaturesthatwillmakeinventorymanagementeasier,suchassuppliermanagement,shippingtools,andproductoversight. AbouttheAuthor DPTaylor DPTaylorisabusinesssoftwareexpertwritingforTheAscentandTheMotleyFool. ShareThisPage FacebookIcon ThisiconsharesthepageyouareonviaFacebook BlueTwitterIcon SharethiswebsitewithTwitter LinkedInIcon ThisimagelinkstosharethepageoverLinkedIn. EmailIcon Sharethiswebsitewithemail We'refirmbelieversintheGoldenRule,whichiswhyeditorialopinionsareoursaloneandhavenotbeenpreviouslyreviewed,approved,orendorsedbyincludedadvertisers. TheAscentdoesnotcoveralloffersonthemarket.EditorialcontentfromTheAscentisseparatefromTheMotleyFooleditorialcontentandiscreatedbyadifferentanalystteam. TheMotleyFoolhasadisclosurepolicy. Manyoralloftheproductsherearefromourpartnersthatpayusacommission.It’showwemakemoney.Butoureditorialintegrityensuresourexperts’opinionsaren’tinfluencedbycompensation.Termsmayapplytoofferslistedonthispage. 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