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Minimum order quantity (MOQ) explained

minimum order quantity

5 facts you need to know about MOQ

What is Minimum Order Quantity (MOQ)? In a perfect world, suppliers would supply the products your business needs in the exact quantity you need. More importantly, they would be more than happy to do this at no extra cost.

However, in reality, placing orders with suppliers is far more complex. Given that most suppliers will impose a Minimum Order Quantity, all constraints must be considered before placing the order.

But what are minimum order quantities? Why do suppliers need to impose such constraints? What impact do MOQs have on your inventory position? More importantly, how can you optimize purchase orders to satisfy order constraints without exposing your business to risk?

What is minimum order quantity (MOQ)?

Minimum order quantities or MOQs are the minimum order size that the supplier is willing to accept. This is often expressed as the minimum number of units. However, suppliers may also set the minimum order quantity in order value. For example, Supplier ABC Ltd will only accept an order above $1000.

As a major constraint, it’s essential that the minimum order quantity for each product is up to date and correct in the master data. If it is not, this could lead to costly mistakes or avoidable delays when placing the purchase order.

Minimum Order Quantity

Why do suppliers have minimum order quantity?

Minimum Order Quantity While MOQs may price some potential customers out, suppliers still need to ensure that they make a profit. After all, the supplier still has transportation, holding, handling and administration costs to cover. Often these overheads account for a small percentage of the overall value of the order. However, the smaller the order quantity, the more these costs increase profit margins.

Take, for instance, the following scenarios:

In scenario A, the supplier makes a healthy profit. However, in scenario B, where the customer order quantities are much smaller, the supplier makes no profit. Worse still, if the supplier would allow customers to purchase in single units, such as in scenario C, they would make a loss on every transaction!

While this is just a simple example, from the supplier’s perspective, selling the products in small quantities makes no financial sense. As a result, suppliers set minimum order quantities to protect their margins.


What impact do minimum order quantities have on your inventory?

minimum order quantityMOQs have a significant influence over how many days of stock a business holds and how frequently purchase orders are made with suppliers. In the example below, we explore how low MOQs impact the inventory position:

High Minimum order quantity

Where the supplier has a high MOQ in place, the most obvious impact is that inventory has to be held in a much higher quantity. As highlighted in the graph below, at the point of replenishment, the business will hold over 20 weeks of inventory. The consequence of this is that the overall holding costs will be very high such as a large volume of stock will take up a much greater amount of space in the warehouse. More importantly, however, a much higher level of working capital will have to be invested to satisfy the MOQ. Consequently, the risk of obsolescence is far greater.

However, the upshot of high MOQs is that products will not need to be reviewed or ordered as frequently. As a result, administration and ordering costs can be minimized. Furthermore, the risk of stockouts is also very low. After all, the supply chain team have several weeks to respond to any potential availability issue!

Low Minimum Order Quantity

minimum order quantityLow MOQs have a very different impact on inventory. If suppliers are willing to accept a much lower minimum order quantity, businesses can hold a much lower inventory level and replenish inventory when required. The real benefit here is that a lower working capital investment is needed, and the risk of obsolescence is reduced significantly.

The danger of ordering to lower MOQs is that the product will have to be reviewed and ordered far more frequently. This, of course, comes at a cost in terms of admin and order processing costs.

Unlike with high MOQ, where volatility is absorbed by the fact that there is a high inventory level in the first place, low MOQ will mean that the inventory levels are likely to be leaner. Consequently, low MOQs leave the operation more exposed to spikes in demand and supply issues. To safeguard availability from such factors, it may be necessary to hold a strategic level of safety or buffer stock.

Summary: High MOQ VS Low MOQ

minimum order quantity

minimum order quantity

How can you optimize your purchase orders?

Disproportionate order quantities cause expensive high average inventory levels and unnecessary risks related to obsolescence. Equally, order quantities that are too small cause unnecessary warehouse operations, avoidable transportation, and administrative costs. So how can supply chain teams find the balance between satisfying the MOQ and keeping costs and risk under control?

Up to this point, we have talked about the MOQ as though it is set in stone. However, where the MOQ is low, in reality, the purchase order will most likely be way above the minimum order quantity. Likewise, with high MOQs, there is always the option to negotiate a more favourable MOQ or find another supplier. Even so, all purchase orders, order frequencies and review times must be carefully considered!

Thankfully this is where the economic order quantity (EOQ) comes in to play!

In essence, the EOQ formula focuses on the main cost areas to determine the most cost-effective order quantity. Ordering the right quantities will ultimately reduce the operational expenses while boosting the return on inventory investment, resulting in integral optimization of your total supply chain costs!

Download our guide to unraveling the secret of optimal order quantities!