15 Jan MOQ DEFINITION & EXAMPLES
What Is MOQ (Minumum Order Quantity)
Manufacturers or wholesale companies determine the minimum number of products that can be ordered, arising from production or supply processes, various expense items such as packaging, shipping. This is roughly the minimum order quantity, i.e. “MOQ”. The reasons determining the MOQ vary according to the features of the product. Sometimes the production cost is the most important reason. Sometimes it determines the lowest MOQ that should be included in the product’s package.
Depending on the productivity of the production line and the factory, it is necessary to determine the economic order quantity, not just the minimum order quantity, in order to find the right quantity and price. Therefore, while companies share MOQ and price information, they offer gradual order figures, where the unit price changes, as an alternative.
MOQ is the amount of product a supplier or seller requires a purchaser to buy at one time. Suppliers often use MOQ for online sellers to determine the least amount of product they are willing to supply or manufacture in a single order. For this reason, it is a concept that we encounter on B2B sites and even B2C sites.
MOQ Definition & Examples
For example, suppose a product has a MOQ of 1000 pieces and a unit price of 10 USD. When the number of orders reaches 10,000, the price can be 8 USD, and for 100,000 units the unit price may be 6 USD.
The unit price differences arise from the fixed costs and profit policy that the manufacturer has to bear depending on the number of products to be produced.
The profit policy can be affected by many reasons such as the order amount of the companies, namely the occupancy rate of the production lines, the competition conditions in the market, the brand awareness rate, etc.
There is a cost to start production in a factory. In order to stop the production of a product and switch to another production, you must first stop production and make some changes. Many reasons are affecting the cost, such as changing moulds, changing raw materials and semi-finished products, cleaning and rearranging lines, stopping production in that process, etc. Therefore, the amount of material to be produced must be at least enough to bear that cost, the MOQ.
While manufacturers try to keep the MOQ high, customers want to lower this amount. For example, if the customer uses 100 pieces of a material per month and the MOQ is 500 pieces, this customer has to store for five months. Due to both the depreciation of the initially paid money and storage costs, the customer does not want to increase the number of orders. At this point, changing unit prices based on MOQ and quantity determine the balance between them. Ideally, the supplier and the customer meet on the basis of mutual benefit, determine the costs jointly and use the EOQ.
MOQ is the minimum order quantity that the manufacturer agrees to supply. We can also define the MOQ in different ways, such as the minimum quantity that the customer can request when placing an order, the minimum number of products written on the order form.
While the customer tries to arrange the MOQ with a quantity that meets his expectations, the manufacturer or supplier insists on accepting his minimum order quantity, taking into account the order’s cost. For example, manufacturer ABC company. By explaining that he can only accept orders from customers who can place more than 1000 orders for X product, he forces customers who want to comply with this lower limit.
In some cases, the customer’s requests to lower the MOQ may make sense. For example, a company that will place an order for the first time may want to purchase a limited number of products to exhibit it in its dealers or test customer taste. In such a situation, it is common for unit costs to be revised and flexible behaviour on MOQ.
In a market where market conditions are stable, and everything works smoothly, manufacturers and suppliers will make the exact product you need in the exact amount you ordered, on time and without extra costs.
However, placing orders with suppliers is much more complicated. Given that most suppliers will follow a MOQ procedure, you need to consider any restrictions and unexpected disruptions you may encounter before ordering.
If you are placing a limited order that does not meet the manufacturer’s expectations, the priority order of your order may be delayed. Cost increases or product losses resulting from production and shipping stages can significantly increase the fixed costs of a limited number of orders.
To avoid the effects of MOQ on your inventory, you should always consider various factors such as optimising their orders to meet order restrictions without putting your business at risk.
Why Producers & Suppliers Set MOQ
The MOQ determined by the manufacturers and suppliers is basically a balance adjustment resulting from the increase in unit production cost as the quantity decreases. If the producer needs to supply an additional raw material for an order, this can lead to processes such as facing a MOQ as a supplier and procuring raw materials at high costs.
Some products have standard waste rates at the beginning and end of production. For example, when the production line starts to work in factories producing in the plastic sector, it gives a standard waste. This wastage can reach 10/1 for a small order, with a very low rate of 1000/1 for a large order. Therefore, it is imperative to apply MOQ in some sectors.
MMQ aims for suppliers to make a profit. As a result, the producer must be able to cover transportation, stocking and management costs as well as production costs. Usually these fixed charges make up a small percentage of the total value of the order. However, the smaller the order quantity the supplier receives, the more these expenses reduce the profit margin.
We mentioned that besides the manufacturers determine the MOQ, the product price they give for MOQ is also different. This is due to fixed costs. For example, if you need to make a special package for your products and write details about your brand or company on the boxes, this is an extra cost.
The manufacturer company has to make a definitive graphic work for 100,000 products within 100 products and prepare packaging and parcels suitable for your products. Similar processes are valid for logistics. The cost of shipping 100 parcels and 10 parcels is not the same, but the logistics cost per case increases as the number of parcels decreases.
Suppose a manufacturer that keeps the MOQ high, keeps it low, and does not apply MOQ, sells at a standard product price. Below, we see the producing company’s profit rates in 3 different scenarios where the product price is kept constant. First of all, because production costs will increase, the production cost per product will inevitably increase.
It is also inevitable that unit costs will increase with the effect of packaging and logistics costs and, consequently, the producer company will suffer. There are exceptions to this example for products. For example, if you order 1 aircraft from Boeing or Airbus companies, there will be no MOQ.
Pros and Cons of MOQ
The main purpose of using MOQ is to get the best price per unit. When the minimum order quantity is determined, the seller firm indicates to the buyer firm the number of units it can sell at a reasonable profit rate. The buyer company has the chance to compare the MOQ and higher-order conditions and make price analysis.
Sometimes, the buyer companies’ monthly or seasonal needs may be below the MOQ and may not want to use hot money for the number of products they do not need. Their warehouse may be insufficient for inventory or do not want to bear the cost of inventory. Small businesses face the problem of increased up-front cost, so MOQs affect retailers this way.
MOQ Effect on Buyers
MOQs are extremely important for suppliers because it determines which businesses they’re willing and able to do business with. If your company has a limited number of sales, the MOQ that any supplier or manufacturer will impose on you will negatively affect your profit in any case.
Especially in highly competitive sectors with many suppliers and producers, there is a high chance of negotiating for MOQ. Suppose you are not afraid of the effects of frequent supplier switching on your product range or customer expectations. In that case, you can get offers from different companies and deal with companies that accept the most appropriate number of orders.
On the other hand, you can make a periodic agreement by stating that you want to place small orders at regular intervals and ensure that the suppliers keep stocks. The key point here is that you can provide the supplier with assurance for the products to be stocked, or the supplier’s trust in you and willingness to work with you.
Hacks to Negotiate MOQ
Here are some tactics you can use to negotiate a minimum order quantity.
a) Order with the sample request: Working with a different supplier each time may have various drawbacks, but if you are going to work with a new supplier, there is a good chance that you will break the MOQ hurdle in the first order. If you are a new customer, it might be reasonable to want to place a limited number of orders to test the market and products. Sometimes suppliers may not increase unit prices for orders below MOQ in anticipation of receiving a large order later.
b) Do the products you ordered require production?: Suppose you request a product in the manufacturer’s stock if a special packaging or marking process is not required for the product. You can negotiate to order below the MOQ demand. In such a case, product prices should not change either. Therefore, commercial success needs to analyze suppliers products variations and stocks well.
c) Find suppliers that produce similar products and work with your competitors: Sometimes it can be helpful to have competitors working with the same suppliers like you. First of all, you can order together by cooperating with companies that do not operate in the same market, in the same region, that is, with which you do not compete.
This both increases your bargaining chances and allows you to combine your orders if you are going to order under MOQ.
You do not want to cooperate with a competitor, but you are using the same supplier. In this case, you need to check if the supplier stocked goods for your competitors. Another option is to try to order with your competitors in similar periods. In this case, the supplier company can accept your orders under MOQ, if you agree on the deadline.