Guide to Minimum Order Quantities
Maintaining the right amount of inventory at all times is crucial for your business to thrive. Carrying too little poses a risk of stockout, while carrying too much can mean reduced cash flow.
When purchasing the right level of inventory for your business, a supplier may require your order in minimum order quantities – often referred to as MOQs. This means that a supplier will require you order a certain minimum number of products as a condition of entering into a transaction with them.
At first glance, this might give the impression that the supplier is willing to lose sales. But in reality, for them, it’s the opposite. Suppliers have margins to meet, which can only be met if their customers order a certain minimum level of goods.
This article will show you how MOQs work, what benefits you can reap from them as a purchasing business, and how to manage them effectively.
Understanding Minimum Order Quantities (MOQs)
A minimum order quantity refers to the lowest number of units a supplier is willing to sell to you at one point in time. For example, a supplier selling beers for $10 per case may require you to have an MOQ of 100 cases (costing $1,000). The MOQ could be in quantity or amount, depending on the supplier.
When fulfilling orders, a supplier incurs production and logistical costs. The company sets a certain threshold quantity to cover all costs involved. Thus, the supplier establishes an MOQ so that the sale becomes profitable for them.
Suppliers work out their MOQ by looking at the big picture – profit margin, costs and expenses. They conduct sensing on market demand and establish a break-even point. After considering all costs into the equation, the supplier can identify target profit margins, then settle for an MOQ.
When fulfilling orders, a supplier incurs production and logistical costs. The company sets a certain threshold quantity to cover all costs involved. Thus, the supplier establishes an MOQ so that the sale becomes profitable for them.
Suppliers work out their MOQ by looking at the big picture – profit margin, costs and expenses. They conduct sensing on market demand and establish a break-even point. After considering all costs into the equation, the supplier can identify target profit margins, then settle for an MOQ.
Why are MOQs important?
MOQs are essential for suppliers to determine the businesses they can partner with easily, and with whom they can establish a lasting relationship. Depending on the scale of your business, you may need to hunt through different suppliers to find one that matches an MOQ you can afford.
However, the benefits of MOQs aren’t just one-sided. Aside from cultivating a sustainable profit margin for the supplier, ordering MOQs helps purchasing businesses like you manage inventory and purchasing costs. It can ultimately become an important part of your sourcing strategy.
However, the benefits of MOQs aren’t just one-sided. Aside from cultivating a sustainable profit margin for the supplier, ordering MOQs helps purchasing businesses like you manage inventory and purchasing costs. It can ultimately become an important part of your sourcing strategy.
Benefits and Drawbacks of MOQs
Minimum order quantities (MOQs) can offer businesses several advantages, such as bulk discounts, streamlined production processes and improved inventory management. However, they also present drawbacks, which we’ll outline in some further detail.
Benefits
Economies of Scale
- Suppliers usually offer discounts for larger orders. This results when the supplier reduces production costs because of increased volume production. When ordering in MOQs, you purchase at a lower price per unit since suppliers sell the bulk quantities at discounted prices.
- Because of quantity discounts, you can leverage your higher inventory by offering bulk order discounts to your customers. This, in turn, will help you sell your products and achieve your profit goals faster.
- Because of the established minimum order quantity, you can determine the pattern or movement of stocks in and out of your warehouse. It therefore aids your inventory planning and management.
- For your business to survive, you must have a long-term partnership with your suppliers. Through order MOQs, you can establish a win-win relationship with them. The supplier will achieve a more predictable cash flow, and you take advantage of quantity discounts.
Drawbacks
Challenging for new businesses
- MOQs, after all, require a steep price to pay for a lot of up-and-coming companies. For businesses that just enter the game and who have little working capital to play with, their options will be more limited.
- For many businesses that take the leap with ordering from a supplier than require MOQs, they may actually lose sales. This is because they could order too much, over-stock their shelves and cannot sell everything they’ve ordered. Many price-conscious customers still prefer to buy in fewer quantities compared to large ones.
- A business may have their heart set on a supplier, but are forced to find somebody else because of MOQs. This is especially the case for smaller business. Larger businesses have a higher capacity to purchase in MOQs than smaller ones – and small-scale businesses might have to cope by finding other means.
Strategies for managing MOQs
No ordering system or principle is perfect and the same goes with MOQs, whether you run a small, medium-sized or large business.
Fortunately, if you know the key strategies to manage them, you can capitalise on MOQs.
Fortunately, if you know the key strategies to manage them, you can capitalise on MOQs.
Negotiate strongly
Your primary goal is to negotiate an MOQ at the most competitive unit price. Suppliers might fold, and settle for a lower MOQ that is more affordable for you.
However, you should take care this a lower MOQ does not sacrifice the at product’s quality through manufacturing your products using inferior raw material. Asking for a sample is a diligent idea.
However, you should take care this a lower MOQ does not sacrifice the at product’s quality through manufacturing your products using inferior raw material. Asking for a sample is a diligent idea.
Mix and match
Rather than focusing on meeting the MOQ by ordering the same product, you can also explore ordering a diverse range of products from the same supplier.
By doing so, you have the opportunity to distribute the MOQ requirement across various items and only purchase quantities that align with your needs.
While this may not be feasible in every scenario, it can be an advantageous strategy when seeking multiple products and aiming to reduce the overall MOQ.
By doing so, you have the opportunity to distribute the MOQ requirement across various items and only purchase quantities that align with your needs.
While this may not be feasible in every scenario, it can be an advantageous strategy when seeking multiple products and aiming to reduce the overall MOQ.
Source your goods from excess stock
If you want to get creative, you can also order surplus inventory from a factory. Where a buyer cancels an order at the eleventh hour, or production faces delays, or quality control standards are not met, factories often seek to sell the surplus products at a cheaper price elsewhere.
While this will usually come at lower MOQ and a reduced price, it is crucial to exercise caution to avoid acquiring faulty or substandard items.
While this will usually come at lower MOQ and a reduced price, it is crucial to exercise caution to avoid acquiring faulty or substandard items.
Maintain a good relationship with your supplier
Maintaining a strong and positive relationship with your supplier can prove to be an effective strategy for reducing MOQs. By demonstrating loyalty, prompt payments and clear communication, you increase the likelihood of your supplier accommodating your requests for smaller MOQs, ultimately benefiting both parties involved.
Ask for help from a professional sourcing agent
Sourcing companies possess extensive knowledge and experience in supplier networks, negotiation tactics and industry-specific practices. Engaging their services allows you to tap into their expertise and leverage their established relationships with suppliers.
Sourcing agents also have a deep understanding of the market and can navigate through the complexities of procurement, enabling them to identify potential opportunities for MOQ reductions.
Sourcing agents also have a deep understanding of the market and can navigate through the complexities of procurement, enabling them to identify potential opportunities for MOQ reductions.
Use MOQs to your advantage
MOQs are inevitably part of how businesses operate and cooperate. The best thing you can do is to use them to your advantage.
Make sure to negotiate wisely before sealing a deal. When negotiating, do not get frustrated. Instead, strike a balance between the costs incurred by your supplier and your own to arrive at an optimal MOQ.
If you still have questions on MOQ and need help managing overseas orders, get in touch with the team at The Sourcing Co. We are a professional sourcing company offices across the Asia Pacific, and can help you negotiate a deal with your supplier that reduces your MOQS and get the most out of your supplier relationship.
Make sure to negotiate wisely before sealing a deal. When negotiating, do not get frustrated. Instead, strike a balance between the costs incurred by your supplier and your own to arrive at an optimal MOQ.
If you still have questions on MOQ and need help managing overseas orders, get in touch with the team at The Sourcing Co. We are a professional sourcing company offices across the Asia Pacific, and can help you negotiate a deal with your supplier that reduces your MOQS and get the most out of your supplier relationship.
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