Inventory is one of the most important assets for retail and e-commerce businesses. But when stocking inventory, it is crucial to strike a balance between meeting customer demand and preventing overstock. To achieve this, you need to find a manufacturer or supplier that sells the right supplies at the right price and allows you to order an optimal number of units.
Minimum Order Quantity (MOQ) is a threshold a business sets for buyers that defines the smallest order they will accept at any given time. Many manufacturers and suppliers impose a minimum order quantity to make customers commit to purchasing enough at one time for manufacturing and fulfilling the order to be profitable.
However, your supplier’s MOQ might not match your optimal stock volume. In order to ensure you are able to maintain the right amount of stock, it is vital to be able to adjust your ordering strategies to accommodate the MOQ of your vendors. So let’s dive in and discover how you can harness the power of MOQ to unlock greater inventory efficiency.
What is MOQ?
MOQ is the minimum quantity of a product that a supplier or manufacturer is willing to produce, sell, or ship to a buyer in a single order. If a business fails to meet the minimum quantity requirement, the supplier may decline the order or charge a higher fee per unit.
MOQs vary significantly depending on product type, production costs, manufacturing capabilities, and supply chain logistics. For example, suppliers of customized or niche products may have high MOQ due to the complexity of production or the need to meet specific order volumes. Sellers and buyers should analyze and calculate their MOQ to ensure it aligns with their business needs and customer demands.
Depending on your supplier and your specific inventory needs, there are two approaches to product procurement: high and low minimum order quantities (MOQs). High MOQ typically requires businesses to purchase more products than they might otherwise to meet the supplier’s requirements. While this can save you from long lead times and lower unit costs, a high MOQ requires a larger upfront investment and may result in increased inventory holding costs and potential risks of overstocking.
On the other hand, a low MOQ allows businesses to purchase smaller quantities, thereby reducing the initial investment and minimizing the risk of excess inventory. This provides flexibility and lower financial commitment but may come with higher unit costs and limited negotiation power.
How Suppliers Determine Minimum Order Quantity
There is no magic one-size-fits-all minimum order quantity for a particular supplier or product. There are a variety of factors that will influence how a vendor determines their MOQ. Understanding how your suppliers calculate their MOQ will help you make more informed decisions when deciding how to align your ordering practices to accommodate their minimums:
- Sellers will analyze historical sales data to identify trends, seasonality, and average order quantities. This provides insights into the typical demand for the product and allows sellers to determine a MOQ that will keep overhead costs down without whether a buyer will still make a purchase.
- A product’s shelf life, holding cost, and storage capacity will all affect its MOQ. Suppliers calculate the quantity that can be sold or used within a reasonable time frame without incurring excessive storage costs or product spoilage.
- Production and manufacturing costs, including factors like raw materials, labor, overhead expenses, and setup or tooling costs, will affect the MOQ.
- Suppliers looking to set their MOQ will typically determine the break-even point for their company. This represents the lowest per-unit dollar amount they will charge in exchange for a larger order value. Prices shouldn’t be so discounted that profit margins are almost nonexistent, so finding a balance between volume discounts and a reasonable profit margin is critical.
MOQ Benefits for Buyers and Suppliers
Though suppliers are usually the ones determining an MOQ that is best for their bottom line, MOQ has benefits for both suppliers and retailers.
Minimum Order Quantity Benefits for Suppliers
- MOQ allows suppliers to optimize their production processes and reduce the time and resources needed to fulfill orders. By doing so, they can reduce their production costs and increase their profits.
- MOQ helps to ensure suppliers can meet customer demand and avoid unnecessary inventory stockpiling, thereby minimizing inventory costs.
- When suppliers or manufacturers set MOQs and encourage larger orders, they earn more revenue on each order, increasing cash flow efficiency.
Minimum Order Quantity Benefits for Retailers
- MOQ saves retailers money because large orders are usually sold at a cheaper cost per unit.
- MOQ helps retailers build quality relationships with suppliers, which can be beneficial when negotiating rates.
- Aligning optimal order quantities with MOQs help retailers optimize their operations and drive growth.
How to Align Your Inventory Strategy with Your Supplier’s Minimum Order Quantity
Now that you have a better understanding of how your vendors determine their minimum order quantities, how can you adjust your ordering practices to match their MOQs? Here are some tips on how to work with supplier MOQs to ensure your inventory levels remain optimal:
Use Inventory Planning Software to Optimize Ordering
A dedicated, data-driven inventory planning software like Inventory Planner is the best way to optimize your purchases to better align with your supplier’s MOQ. Inventory Planner allows you to pre-set the MOQ for each supplier, which will be automatically applied to a new purchase order, saving you valuable time and eliminating human errors. Plus, it offers inventory ordering recommendations based on intelligent customer demand forecasts, factoring in the latest sales trends, lead times, seasonality, and marketing promotions, so you know exactly what to order, how much, and when.
What’s more? Inventory Planner offers 200+ meaningful metrics to help you make better purchasing decisions. For instance, with metrics like forecasted lost revenue, and forecasted lost profit due to delayed replenishment, you can prioritize purchasing when budgets are tight.
Other Strategies to Deal With Supplier MOQ
Collaborate With Other Businesses
Collaborating with other businesses can be an effective strategy when your demand is not up to your supplier’s minimum order quantity. Through joint orders, two or more companies can combine their purchasing power to meet the MOQ requirements of their suppliers. This collaborative approach enables businesses to overcome limitations, reduce shipping costs, and achieve economies of scale, ultimately improving profitability.
Eliminate Stock Keeping Units (SKUs)
When facing MOQ challenges, businesses can avoid overordering by working to strategically eliminate slow-moving SKUs from their product catalog. Inventory Planner’s accurate insights and reliable ordering recommendations can help narrow your product offerings and eliminate some SKUs that aren’t driving revenue. This will allow your business to optimize purchasing decisions, free up inventory space, and reduce holding and operational costs.
Explore Alternative Sourcing Options
Exploring alternative sourcing options is a valuable strategy for businesses facing MOQ challenges. Negotiation should be the first step when your manufacturer imposes a higher MOQ than your demand, but when negotiations fall through, finding an alternative supplier is the next step. Inventory Planners advanced reporting metrics will help you determine which suppliers may be tying up your cash flow with MOQ so you can seek a better option.
Focus on Building Relationships
By cultivating a strong partnership, businesses can negotiate lower MOQ or customized arrangements that align with their specific requirements. Exploring flexible MOQ options will also allow companies to adapt to fluctuating demands and minimize the risk of overstocking or stockouts.
Boost Inventory Turnover
Boosting inventory turnover can help alleviate MOQ issues. If you’re forced to order more inventory because of minimum order quantities, it can incentivize you to prioritize turning over those items faster, as you’ve invested more upfront capital. You can run flash sales and marketing campaigns, sell bundles, or implement other creative strategies to attract and retain customers.
Inventory Planner helps you navigate vendor rules like minimum order quantity, accurately forecast customer demand, and make profit-boosting inventory purchasing decisions for your business. With its intelligent forecasting capabilities, you can stay ahead of demand shifts and make informed buying decisions that future-proof your business. And with Inventory Planner’s customizable dashboard, you can easily input supplier restrictions that may affect optimal order quantities, and the software will automatically adjust recommendations. Don’t get bogged down by complex and time-consuming manual calculations. Inventory Planner’s reliable demand forecasting automatically adjusts to market changes, ensuring you are ordering the right products at the right times to drive growth and profitability.
Make your supplier’s MOQ work for you with Inventory Planner
Free up cashflow with better inventory turnover and reduce safety stock with accurate recommendations