What is Minimum Order Quantity?
Minimum Order Quantity (MOQ) refers to the minimum number of products or units that a supplier is willing to produce and sell and can be set per order, per product, per size or by colour. MOQs can be negotiable, but it’s up to the business to do the negotiating with the supplier, in order to work with them. If a business is not able to meet the MOQ, the supplier is not likely to work with them.
On the manufacturer’s end, MOQ allows a manufacturer to sell their products in large quantities or in bulk.
How to Come Up With a Minimum Order Quantity
There’s no one rule or criteria manufacturers follow when coming up with a minimum order quantity number.
The MOQ is calculated differently by each supplier and ensures that they will be able to cover the cost of production and make a profit as well. Some businesses are small and only need a very low number of products or units from a supplier. Other businesses are much larger and are selling more products more frequently, so they would need to use a supplier that matches their particular demands.
While minimum order quantities are often provided by suppliers, it’s important to always open up communication lines and ask your suppliers if they can offer lower minimums if you need to. Being open and honest about ordering minimums and frequency can help you develop a stronger relationship with your manufacturing partners.
For suppliers, when planning and deciding on an MOQ, several factors must be taken into consideration. Of course, there’s the type of product you are offering, its value, and the profit you are aiming for.
Here are some tips to keep in mind:
- Get a total amount of all production expenses.
Production expenses include raw materials, labour costs, equipment, electricity, and other costs related to manufacturing your product. When you have the total amount of these expenses, it would be easier for you to determine your desired profit. Your MOQ should at least be able to give you more than the minimum profit you are expecting.
- Be realistic. Can you deliver your MOQ?
One of the most common mistakes especially among new manufacturers is how they overestimate their production capabilities. Be sure that the MOQ you specify is doable and achievable. You can always increase your MOQ after you successfully completed the first order.
- Be prepared to face drawbacks.
While you’re hoping for the best, there are times when things don’t fall into place or as planned. Lack of raw materials, a buyer cancelling on the last minute, inferior quality finished products, employee mistakes, damaged and returned items, and so on are only some of the things you should be prepared for.
- Identify your minimum desired profit per piece.
You don’t want to get the bare minimum profit per order because you have to take into account some of the drawbacks mentioned above. By identifying your minimum desired profit per item manufactured, you can determine losses and remaining profit in case there are any lost, damaged, or returned items.
The Importance of Minimum Order Quantity
How important is minimum order quantity anyway?
MOQs can provide a target or goal for growing businesses to reach. While smaller, local suppliers may have lower MOQs, the cost per item may be greater. As your business grows, you can look to reduce your cost per item by increasing your order size. Many suppliers will use order indent sizes to give price breaks for different quantities of items. This encourages larger orders which can ultimately reduce shipping costs from multiple smaller orders.
MOQ offers plenty of benefits to manufacturers. It is the best way to quickly gain revenue as your customers will be purchasing your products in bulk.
Among the advantages of MOQ are the following:
- Continuous Workflow and Fast-Moving Inventory
When you have already established your manufacturing business, you might have already hired employees, purchased equipment, and bought raw materials. By setting an MOQ and getting orders in bulk, work becomes continuous and your inventory turnover remains healthy.
- Returning Customers
If your customers or buyers are satisfied with the goods you produce, they will likely come back to you to order more. When they order again, it will be another batch that follows your MOQ.
- Custom-Made Products
An MOQ enables you to have enough budget to make customised products for your buyers.
- Increase Revenue Quickly
Instead of selling products one-by-one, which means earning profit per item only, an MOQ allows you to get larger profit from bulk sales.
Minimum Order Quantity Precautions
While minimum order quantity offers plenty of benefits to a manufacturing business, it is not always smooth-sailing. Manufacturing businesses will want to be cautious about these issues:
- Order Cancellations
Especially when your products are not on-hand and are made-to-order, then you would have to be very careful with potential order cancellations. Make sure you have signed a contract with your client. You can also ask for a deposit or an advanced full payment.
- Haggling Buyers
There will always be buyers haggling with your prices or even your MOQ. Some negotiations are fine but others might just be too much. Set your prices or MOQ a little higher compared to your worst-case-scenario price or MOQ. This allows you to remain profitable even after agreeing to a negotiated price or MOQ to a buyer.
- Other Negotiations
A lot of negotiations happen in the manufacturing business. For example, a buyer might want to return unsold items to you for a refund or discount for their next order. Your MOQ gives you the right to reject such after-sale negotiations.
Minimum order quantity certainly has a lot of advantages to offer, but you must also be reasonable when identifying your MOQ. For instance, a $1,000 per piece product can’t easily have the same MOQ as a product worth $5 each.
Being firm yet reasonable is how minimum order quantity can work for you.