When placing an order with some manufacturers and wholesalers, they may require a minimum order quantity (MOQ). That means sometimes manufacturers, suppliers and wholesalers will turn away some customers if they are not willing or able to meet the minimum order quantity.
While it seems counterintuitive that turning away business could lead to higher profits, it's essential to understand how minimum order quantity works and why some suppliers may use them, particularly in low-margin or highly customized businesses. If managed carefully, minimum order quantities can increase your bottom line.
What Is Minimum Order Quantity (MOQ)?
Minimum order quantity is the fewest number of units a business is willing to sell to a single customer at once. While a retail store may be happy to sell a single t-shirt or one head of lettuce, it isn’t usually profitable to sell a single unit. They may require a minimum order of hundreds or thousands of units, depending on the product.
Many manufacturers sell in bulk to wholesalers, who then sell in bulk to retailers using an MOQ. Then individuals can go to the store to buy just one or two of a product.
Minimum Order Quantity (MOQ) Defined
Here’s a common definition of minimum order quantity:
A minimum order quantity is the fewest number of units required to be purchased at one time.
To better understand what MOQ means, here’s an example. Assume a wholesaler sells widgets for $100 each. The supplier has a minimum order quantity for widgets of 100 units — or at least $10,000. The MOQ can be done a per-unit basis, or a dollar figure. Regardless, this MOQ represents at least the minimum for the company to turn a profit on a particular order. There may be set up costs, administrative expenses, minimum amounts of raw materials the supplier can order and other constraints that go into this calculation.
Why Do Suppliers Use Minimum Order Quantity (MOQ)?
Generally, suppliers use MOQs for one reason: sale margin — or the amount of profit generated by the sale of a service or product. If a supplier sells products at a minimal markup or on a tight margin, it can take a large volume to break even after factoring in overhead and other recurring costs.
Different industries have different reasons and ways of determining what the MOQ will be. One example would be a manufacturing business that has to set up a production run may have significant up-front costs. Unless it sells enough units to make up for those costs, it isn’t worthwhile.
A wholesaler or manufacturer is going to sell cases of products, and they’ll want to sell a full case to avoid the additional labor and costs associated with breaking them down and shipping in partials. If they were selling shampoo, for example, they would ship one case containing 12 units, so the MOQ would be 12 — one case.
How Does Minimum Order Quantity (MOQ) Impact Inventory?
Minimum order quantities have noteworthy effects on inventory for both the seller and the buyer. Sellers that choose a high minimum order quantity have to produce and possibly warehouse large quantities and the MOQ impacts how they manage inventory. Buyers, on the other hand, have to decide if they will need at least the MOQ of a product, or else they’ll need to look for another supplier with a smaller MOQ or consider inventory storage options. Buyers have to consider things like warehousing space and potential savings realized by ordering in bulk.
High Minimum Order Quantity (MOQ)
When suppliers have a high minimum order quantity, they may need to keep a substantial amount of inventory on hand to fulfill orders. If suppliers want to keep a low inventory and use just-in-time inventory management, they may need longer lead times to fulfill orders. Larger inventory requirements tie up a significant amount of working capital and take up warehouse space. But they lower administrative costs because products or raw materials can be ordered less frequently, which can result in bulk savings from various materials and component parts down the supply chain. And while there is a lower risk of stockouts, there is an increased risk of products becoming obsolete, especially for items such as electronics.
Low Minimum Order Quantity (MOQ)
With a low minimum order quantity, suppliers don’t need as much inventory on hand for orders, as they’ll likely see a lower average order size. That could mean less inventory with higher inventory turnover. Low MOQs can add pressure to your sales team, who may need to manage more customers and work harder to drum up business. There are higher administrative costs because of more frequent ordering. And while suppliers with a low MOQ can risk running out of stock, they lower their risk of obsolescence.
High MOQ vs. Low MOQ
Typical minimum order quantity levels vary by product and industry. Here are common inventory and lead time guidelines for high MOQ and low MOQ businesses:
|Inventory Required||Typical Lead Times||Better Margin Match|
|High MOQ||High inventory levels||Higher lead times||Low margin products|
|Low MOQ||Low inventory levels||Lower lead times||High margin products|
Benefits of Minimum Order Quantity (MOQ)
For suppliers and buyers, minimum order quantities can have several significant benefits. When managed well, the MOQ can be an important inventory control measure and keep costs down for buyers, and keep profit margins in the black for suppliers.
Benefits for Suppliers
Improved cash flow: When product prices and order sizes are managed well, an MOQ can help suppliers have a healthier, more predictable cash flow.
Lowered inventory costs: In some cases, MOQs can keep inventory costs in check. Instead of making an order large enough to make a profit and then searching for many small buyers, some orders are only produced when there is a buyer ready to purchase an amount that will be profitable for the supplier. This can reduce reliance on warehouse space and lower inventory costs.
Better profit margins: By carefully using MOQs, suppliers can better control their profit margins, so goods are only produced when there are worthwhile profits behind the order.
Benefits for Buyers
Economies of scale (bulk savings): Buyers often know they’re getting the best price per unit when working with suppliers with MOQs. Sometimes the savings from buying in bulk can mean more profit for buyers — even with increased warehouse costs or having to sell items at a discount to increase the inventory turnover.
Improved relationships with suppliers: The relationship with a supplier of raw materials and products is of utmost importance. Understanding the relationship of the buyer’s economic order quantity (EOQ) — or the ideal quantity of inventory — and the MOQ can be a delicate balance. And when the MOQ is more than the EOQ, buyers can sometimes work with suppliers to negotiate possible compromises or solutions, such as order splitting with other buyers.
Drive Profitability With MOQ
Why would a business set a minimum order quantity that could price out some potential customers? It all comes down to profitability. Businesses shouldn’t engage in sales that lose money. So, if suppliers have a threshold amount of a particular product where it becomes profitable, an MOQ can be a sound business practice.
The adjustment period may be a challenge when setting an MOQ for the first time. But the growing pains may be worth the reward suppliers can reap. The MOQ helps prospective buyers know what to expect. And it can shift the entire business culture to focus on only the orders that will be profitable for the company, rather than focusing on dispensing many small orders. Again, this may come with challenges, but when suppliers specialize in fulfilling larger orders, they can offer a more consistent and positive customer experience that ideally leads to repeat orders, other large-order customers and profit growth. Suppliers may also choose to have varying price points with discounts for higher-quantity orders to help make the transition to working with MOQs or varying their approach to working with buyers.
Types of MOQs
MOQs are a reflection of the economic constraints for suppliers associated with processing an order. These can include materials, machinery and other costs of executing the order, like shipment costs. The constraints can also be administrative, such as bookkeeping and billing.
Simple MOQs are usually defined as MOQs with one lower limit — either in a dollar amount or in a quantity of units, sometimes called “eaches”. Complex MOQs have multiple limits and can include minimum parts or materials, dollar amounts and/or finished products.
Many companies that aren’t retailers deal with at least a simple MOQ. This means there is a single restraint on orders. That lower-end limit could be a minimum spend or a minimum quantity ordered. For example, a book printer will likely have a minimum order required. It simply wouldn’t be profitable for most printers to set up their presses, get the printing plates made and do a full print run for a handful of books. They’ll likely require a minimum order number that will make the print run profitable.
Instead of dealing with just one restraint, complex MOQs have two or more requirements for orders. A good example might be a clothing manufacturer. For people ordering products, it’s not just a simple minimum number of items. Usually there are other restraints, such as a minimum length of fabric per color and fabric type used, a minimum number of pieces or units, as well as a minimum dollar amount. For buyers to place an order, all these conditions must be met.
As the name implies, setting up complex MOQs for suppliers isn’t always simple, and a lot of information goes into the calculations. Suppliers need to understand the granular cost information of each component piece, as well as the labor and administrative costs that go into the order.
What Influences Minimum Order Quantity (MOQ)?
When considering MOQs for suppliers, there are two primary considerations: raw materials and order volume.
Suppliers of products have to deal with their own MOQs down their supply chains, just like wholesalers buying finished products from the suppliers. Factories that make the raw materials for the suppliers rarely store inventory. Instead, production on polymer plastic that will go into making bottles, for example, will only begin after receiving an order. And that order will likely have an MOQ. So, a supplier of custom-made water bottles will need to consider the minimum amount of polymer plastic, as well any other components that would go into the production, when setting up their own MOQ for buyers of their goods.
The shelf life of items must also be considered. For example, when setting up an MOQ for foodstuffs and other perishable goods, how long those goods can last before spoiling should be a part of the calculation. Even for electronics or other durable goods sometimes shelf life should be a consideration. They may not spoil, but they might become obsolete or less desirable as new products are released.
Order volume is at the heart of MOQs. Finding that break-even point for when an order will begin to make profit for a supplier is pivotal.
Before creating MOQs, suppliers should consider who they’re selling to, and who they’d like to be selling to. For example, if their primary customer base is small retailers, the MOQ will likely be much lower than if the customers are big-box retail chains. And pricing of products will need to be adjusted accordingly (e.g., higher prices for lower MOQs to ensure they can still turn a profit). If the supplier usually sells low-margin or high-volume products, they may need a high MOQ to break even.
How to Calculate Minimum Order Quantity (MOQ)
Calculating minimum order quantity varies in complexity by product and industry. And it likely will not be static. As different component parts and raw materials change prices down the supply chain, suppliers may need to alter prices and MOQs to stay profitable, particularly if operating on low margins. Inventory management software can help suppliers stay on top of the dynamic nature of MOQs and ensure accurate calculations. Software that is part of a larger enterprise resource planning (ERP) platform can be particularly useful. ERP software brings together data from various areas of your business into one digital ecosystem to help with even more accurate and insightful information. For instance, supply chain management software is integrated with the finance management platform so suppliers can have accurate, up-to-date information about raw materials and component parts to use to calculate ideal MOQs.
There is no set formula for calculating MOQs, even for a simple MOQ. But here are some basic steps to consider when getting started making MOQ calculations:
Consider demand: Look at historical data and forecast demand. If suppliers are traditionally receiving orders for around 500 units, suddenly implementing an MOQ of 5,000 might not be feasible. Other considerations are things like seasonality and lead times, or how it takes to produce an order.
Calculate holding costs: How much is a supplier paying to store products? This may vary by the specific item. For example, some products need to be stored in refrigerators or may have odd shapes, making inventory management more difficult. Holding inventory for long periods of time is never ideal, and these costs need to be accounted for in MOQs.
Find the break-even point: If a supplier were to sell 50 units at a fair market price, would that supplier turn a profit? How about 500? They’d need to calculate all the overhead costs like labor, setup charges and other production and delivery costs. Eventually, they’d find the break-even point, which is a vital part of determining MOQ.
Set your MOQ: After gathering all the data, set MOQs for each product and create a strategy for how to implement it. If necessary, use bulk-buying discounts and other incentives to increase the average order volume (AOV). And work with customers where possible to maintain relationships.
For example, let’s look at a buyer that purchases 550 unites from a supplier every six months, but the supplier wants to implement a 1,000-unit MOQ. That supplier could work with the buyer to order 1,100 units at a discounted price and ask the buyer to either pay in installments, pay a carrying fee to cover the supplier’s inventory costs or the buyer may store the products because they’ll be used in that same year.
Three Steps to Implement a Minimum Order Quantity (MOQ)
For suppliers that are just getting started, or those that would like to implement an MOQ on some or all of their products, it’s important to be deliberate with the process. It takes more than simply announcing the new change or arbitrarily deciding on an MOQ that would be ideal for the supplier’s business without considering market conditions. Here are a few tips to consider before getting started.
Carefully calculate the target MOQ: Start by finding the appropriate MOQ for each product (see tips above).
Inform existing customers: For suppliers that are starting to implement an MOQ and already have existing customers, let them know well in advance — even if they normally meet the MOQ. Work with them so they understand why the MOQ is being implemented. And try to find ways to continue working with buyers that don’t normally order enough to meet the MOQ. Suppliers should also understand that they may lose some customers.
Enforce the MOQ: The MOQ only works if it’s enforced. Suppliers should start conversations with sales reps and account managers early so they understand how the MOQ works, and what possible recourses are available. There may be instances where negotiations can take place, but the sales team needs to understand when and how profits are made on the orders of each product.
Manage MOQ With Inventory Management Software
Calculating an MOQ should not be done with pencil and paper. For the vast majority of companies, it’s too complex even for basic spreadsheets. Costs fluctuate, market conditions change, and details like order quantities, amounts and others can get lost without the aid of software to manage your inventory. Supply chain management software that is part of an overall ERP platform will help you dig deep into the details of order quantities, profit margins and other details. This information can be displayed in dashboards with simple-to-understand visuals. Being able to see at-a-glance and up-to-date information not only helps you determine your ideal MOQs, it can also be a powerful tool for other team members to understand key details, such as profit margins and other key performance indicators from your business.
MOQs start from a basic premise: Companies have to take in more money than they spend in order to turn a profit and stay open. This can start at a fundamental level by looking at individual products to see what it costs to produce them — including hard and soft costs — and calculating how much you need to sell them for and the minimum order to make profit. This MOQ may be straightforward and be a simple dollar or unit minimum order, or it may be complex with several different component parts.
Regardless, calculating MOQs and tracking order information is aided with inventory management software. The platforms can serve up dashboards to help you understand costs, supply chain details and other information. Those dashboards can be an important educational tool for sales and management teams, so they better understand why MOQs are in place and how to work with new and existing customers to meet order minimums.
Frequently Asked Questions
To decide minimum order quantity, look at the gross profit margin per unit sold and compare it to your overall production costs. This should include hard costs for things like materials, as well as soft costs, such as marketing and administrative expenses. Your minimum order quantity should ensure that every sale is profitable.
A minimum order is the smallest order size a business is willing to fulfill. That size will vary by industry and supplier.
Consider overhead costs, sales volume and profit per unit to determine the ideal MOQ.
MOQ stands for minimum order quantity. In a supply chain, you may see various MOQs. For example, a supplier of a finished product may have a minimum number of units required for purchase (like a minimum number of books printed). And even the supplier may see other MOQs down the supply chain, like that same book printer may see a minimum amount of paper per order requirement.