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Minimum Order Quantity: meaning, impact, formula and benefits
Order fulfilment

Minimum Order Quantity: meaning, impact, formula and benefits

Yukta Anand
October 8, 2022
5
mins read

Inventory is a crucial asset of ecommerce businesses. Brands have to maintain a sufficient amount of inventory at all times to ship orders on time. Moreover, inventory levels should not be so high that it becomes obsolete and not so low that orders cannot be promptly shipped.

However, sourcing and maintaining inventory is not always easy. Ecommerce sellers have to negotiate with multiple suppliers to source inventory and get a good rate, that can be time-consuming and cumbersome. Additionally, suppliers may set Minimum Order Quantities (MOQ) to ensure cost-effectiveness in production. On the other hand, Minimum Order Quantity (MOQ) can be a hassle for buyers as its puts restrictions on their buying capacity.

If your supplier’s Minimum Order Quantity (MOQ) is not close to your inventory requirement, it can be difficult to source and maintain it. Fortunately, with the right strategies, Minimum Order Quantity (MOQ) can be beneficial for both ecommerce suppliers and sellers.

In this blog, you will understand the meaning of Minimum Order Quantity (MOQ), its types, the impact of MOQ on inventory, how to calculate MOQ and its multiple benefits.

What is Minimum Order Quantity (MOQ)?

Minimum Order Quantity (MOQ) is the least number of product units a seller must purchase from a supplier at one time. If a seller doesn’t purchase the minimum quantity, the supplier does not sell him the product.

For example- you are an ecommerce seller that sells stationery items. Your supplier's Minimum Order Quantity (MOQ) for a category of pens is 100; this means that you can’t purchase less than 100 pens in one go.

What is the impact of Minimum Order Quantity (MOQ) on inventory?

Minimum Order Quantity (MOQ) is a variable that significantly impacts the entire inventory management. This means, inventory levels must be maintained and managed depending on whether a supplier's MOQ is high or low.

Let's look deeper at how Minimum Order Quantity (MOQ) affects the frequency of purchase orders, the number of days inventory is held and warehouse management.

High Minimum Order Quantity (MOQ)

If the Minimum Order Quantity (MOQ) is high, suppliers must produce and store a high quantity of products to fulfil orders. On the other hand, buyers must assess whether they need and can maintain a high Minimum Order Quantity (MOQ) of a product or not.

The advantages and disadvantages of a high Minimum Order Quantity (MOQ) are as follows-

Advantages

  • Fewer chances of stock-outs
  • Lower administrative costs as raw materials would have to be ordered less frequently (since a large quantity of inventory is produced and shipped in one go)

Disadvantages

  • The cost of maintaining inventory rises as more ecommerce warehouse space is required
  • Higher chances of a product becoming out of date if inventory is not sold completely

Low Minimum Order Quantity (MOQ)

If the Minimum Order Quantity (MOQ) set by a supplier is low, a smaller amount of inventory has to be produced and maintained since the order size is smaller.

At the same time, ecommerce sellers have to assess whether a low Minimum Order Quantity (MOQ) will fulfil their demand. Moreover, sellers have to check whether a low Minimum Order Quantity (MOQ) is cost-effective since inventory would have to be stocked repeatedly, which incurs costs like freight charges.

Advantages

Disadvantages

How to calculate Minimum Order Quantity (MOQ)?

There is no specific formula to calculate Minimum Order Quantity (MOQ). Instead, it depends on distinctive factors like demand, a business's size, location, sector of operation and more. This means that each ecommerce seller can have a different Minimum Order Quantity (MOQ).

You must be wondering how to calculate Minimum Order Quantity (MOQ) for your business; here are some factors to consider when deciding on Minimum Order Quantity (MOQ):

1. Estimate demand

Inventory and demand go hand in hand when calculating Minimum Order Quantity (MOQ); the higher the demand, the higher the Minimum Order Quantity (MOQ) can be and vice versa. Demand for a product depends on product type, season, competition and customer preferences; it can be calculated using historical sales data.

A supplier's Minimum Order Quantity (MOQ) should be close to your demand, not too high that you are left with unsold inventory and not too low that you must restock inventory frequently as it increases expenditure.

2. Calculate holding cost

Holding cost refers to the cost of storing inventory in an ecommerce warehouse or fulfilment centre. The longer inventory is stored, the higher the expenditure. Thus it is cost-effective to store inventory for a short period of time.

By calculating your ecommerce warehouse expenditure, you can decide how much inventory can be maintained within your budget. While calculating, also factor in special needs like refrigeration which increases the cost of storing inventory.

3. Assess the break-even point

The break-even point is when the supplier has no net loss or gain, i.e. total expenditure equals the total revenue. Therefore, Minimum Order Quantity (MOQ) should not be less than your break-point, as this ensures you do not suffer losses. At the same time, a seller’s Minimum Order Quantity (MOQ) should not be so high that it forces buyers to purchase from a different ecommerce seller.

Tip- Once the demand, holding cost and break-even point is calculated, decide on your Minimum Order Quantity (MOQ) according to your ecommerce business's requirements.

What are the benefits of Minimum Order Quantity (MOQ)?

Minimum Order Quantity (MOQ) may seem advantageous for sellers as they will be able to sell enough product units in one go without bearing a loss. Minimum Order Quantity (MOQ) can seem disadvantageous for buyers as they are forced to purchase a specific number of product units at one time, even if they don’t need it.

Fortunately, optimising Minimum Order Quantity (MOQ) can benefit your ecommerce business regardless of which side you are on.

Benefits for suppliers

1. Better cash flow

Minimum Order Quantity (MOQ) ensures that inventory is not so high that it becomes obsolete and not so low that it leads to stock-outs and orders cannot be fulfilled, leading to missed sales opportunities and revenue loss. Thus, it helps ensure a streamlined cash flow.

2. Lower inventory costs

Storing too much inventory for a very long period of time can cut into your profits (as it raises holding costs), but you can prevent this by calculating your demand and then choosing the Minimum Order Quantity (MOQ) accordingly.

3. Improved profit margins

Minimum Order Quantity (MOQ) is a safety net for suppliers as they are set to ensure a certain profit margin in all orders.

Benefits for sellers

1. Higher savings

Efficient management of inventory using Minimum Order Quantity (MOQ) helps save on storage costs as only the required amount of inventory is stored. Moreover, Minimum Order Quantity (MOQ) increases savings through bulk purchases.

2. Fresher inventory

A supplier with a Minimum Order Quantity (MOQ) would store the least amount of inventory required, meaning you receive fresh inventory each time.

Strategically implement Minimum Order Quantity (MOQ) with Eshopbox

A tech-enabled logistics provider like Eshopbox can help ecommerce sellers successfully implement Minimum Order Quantity (MOQ) without it being time-consuming.

  • You can split and maintain inventory across Eshopbox’s multiple fulfilment centres
  • Eshopbox provides an actual inventory count to help you set your Minimum Order Quantity (MOQ)
  • Eshopbox helps you save on ecommerce warehouse management and inventory management costs through Minimum Order Quantity (MOQ)
  • Eshopbox provides active inventory replenishment reminders and prevents stock-outs
  • With Eshopbox, you can ease your holding capacity for a long time by spending less on it
  • Eshopbox helps you reduce freight charges by storing inventory in fulfilment centres located near areas of high demand
  • With Eshopbox, you can provide same-day, next-day and express shipping to your customers

Bottom line

One factor that can greatly influence inventory management is Minimum Order Quantity (MOQ). While most sellers consider MOQ to be non-beneficial, that isn’t always the case. Both ecommerce suppliers and sellers can benefit from increased savings and profit margins if MOQ is used strategically. A tech-enabled logistics provider like Eshopbox can help you successfully implement Minimum Order Quantity (MOQ) and ensure greater savings.

Connect with our fulfilment expert today.

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