What Is Minimum Order Quantity (MOQ)?

What Does MOQ Mean?

So, what is the minimum order quantity definition? Further, What does MOQ stand for in manufacturing? Simply put, MOQ stands for Minimum Order Quantity. This is a quantity established by a seller, and represents the minimum amount of a product that a customer can order. But, what is order quantity? This is the number of units in an order. An MOQ typically seeks to identify a minimum order quantity at which the supplier can make a profit. In other words, this is the amount of a product, below which, a supplier will refuse to sell.

What are MOQs for?

So, why would a seller impose a minimum order quantity? Isn’t more business generally better? Why cut out smaller purchases? There are a number of reasons, but one of the most common is cost-effectiveness of MOQ, meaning in supply chains, that costs associated with shipping and storage can make batches below a certain size less financially feasible.

Selling batches of products may often necessitate additional inventory carrying costs — such as that of shipping, storage, and communication with the customer. Due to these costs, it may be necessary to sell a certain amount of a product in order to effectively drive revenue sufficient to recoup these costs. As such, many suppliers will establish  minimum order quantity with the goal of ensuring that orders are financially viable for them. To better understand, let’s look at a theoretical example:

Example of MOQ

Suppose you're in the motorcycle gear business. Let's consider a scenario where shipping costs necessitate a minimum spending of $50 to ship out motorcycle jackets.

With the production cost of each motorcycle jacket being $20, if you were to send out a single jacket, it would cost you $70 in total ($20 for the jacket and $50 for shipping). Shipping 25 jackets would result in a loss as you'd only receive $50 in revenue but incur $70 in expenses.

However, if you set the order quantity at 50 motorcycle jackets, you'd break even. You'd spend $50 on shipping, $1,000 on producing the jackets, and receive $1,050 in exchange.

Additional Considerations

Whether you’re buying or selling, MOQs can necessitate some important considerations. For example, when establishing a relationship with a supplier, it can be important to frankly discuss the viability of different order sizes on both ends to ensure that such a relationship can benefit both businesses.

Inventory Management

MOQs can pose one of the challenges in inventory counting, particularly for buyers. When faced with minimum order qualities, it’s often important to weigh its benefits against its drawbacks. While larger minimum orders may result in more cost-effective orders in the long run, the storage space needed should your inventory overflow can necessitate additional storage related costs. 

Cost-Effectiveness

MOQs can have important cost considerations for both sellers and buyers. Sellers must ensure that minimum order qualities are both feasible economically and sufficiently low enough that they don’t deter anchoring customers. Meanwhile, buyers must ensure that meeting a minimum order quantity requirement won’t necessitate storage costs sufficient to offset the viability of buying from that supplier.

Establishing Relationships

In some cases, the establishment of an important partnership or business relationships may necessitate conversations around minimum order quantities. In addition to ensuring that suppliers offer feasible pricing, high enough quality goods to meet your needs, and adequate customer service, it may be important to ensure that they also impose a minimum order quantity that you can feasibly meet when you make orders without either spending too much, or overstocking.

Calculating MOQ

To calculate MOQ for motorcycle gear, you'll need to develop an effective minimum order quantity formula that considers the costs associated with shipping and the revenue you can anticipate from such an order. For instance, a viable minimum order quantity in this context would likely need to exceed a certain threshold to ensure a consistent profit.

The Bottom Line

Minimum order quantities, or MOQs are an important part of doing business for many organizations. Standing for minimum order quantity, these are amounts established, below which it may not be feasible to sell and below which a supplier refuses to sell. While it may initially seem counterintuitive to turn away any business, it’s important to understand that businesses often implement and impose minimum order qualities in order to ensure that they can viably continue to sell their goods. Understanding MOQs can be important for businesses of all sizes, since they can significantly impact business decisions such as which supplier to choose.

Remember, if you’re looking for a way to simplify your inventory counting processes, we’re here to help you with our inventory counting tool. At Zupan, we’re dedicated to simplifying inventory counting so that you can get back to what matters most in your business. To learn more or get started, be sure to reach out today.