Minimum Order Quantity (M.O.Q.) Formula & Definition
When demand arrives for your e-commerce business, you need to have the inventory available to meet those demand expectations.
A minimum order quantity (or M.O.Q.) tends to be implemented by suppliers to ensure that they are also making a profit from your ecommerce order.
Identifying the difference between a suppliers’ M.O.Q. and your economic order quantity is essential in determining the sustainability of a supplier partnership. If their minimum order quantity is higher than your economic order quantity, that supplier’s pricing may not be best suited for your business.
What Is Minimum Order Quantity?
A minimum order quantity is the lowest amount of inventory that needs to be purchased at a single time. This quantity is usually used by suppliers or manufacturers to ensure they are able to make a profit off of all orders to their business.
Here is an example of a minimum order quantity:
- At any amount below 500 units of X, the supplier won’t make any profit, so a minimum order quantity of 501 units has been set for all orders.
The 4 Steps To Calculate Minimum Order Quantity
1. Determine When You Reach Profit
Before you try to establish your minimum order quantity, knowing your break-even point is essential. The whole purpose of your ecommerce business is to make a profit, so understanding at what inventory level your profit begins will tell you what the minimum order quantity should be, so that you aren’t losing any money.
Be sure to adjust inventory costs and their effect on your break-even and minimum order quantity values when interacting with wholesalers.
2. Be Aware Of Your Holding Costs
Depending on the size, length of stay, and other warehousing requirements of your inventory, holding costs may be cutting into your profits.
Your minimum order quantity should also be mindful to try to lower holding costs and should be impacting your overall ordering decisions.
3. Find Your Estimated Demand
Using demand forecasting, identify the estimated quantity of sales of your product over the last period. If your demand is close to what the manufacturer/supplier’s minimum order quantity is, that supplier may be suitable to purchase your inventory from.
Be sure to monitor your demand during volatile times, including:
- Having constant communication with you and the supplier
- Ensuring you have safety stock in case of demand surges
- Adjusting demand forecasts very often
4. Calculate Your M.O.Q.
Depending on the previously listed factors as well as any minimum order quantities your suppliers or partners may have, identify the minimum inventory order to net a profit, and then place order floors on that specific inventory type or product.
How To Get The Benefits Of M.O.Q.
A minimum order quantity can be limiting on the side of the ecommerce business and beneficial on the supplier’s part. An M.O.Q. can be a major point of interest when working with partners, but here are some ways to work with an M.O.Q. in place:
Keep Your Inventory Strategy Simple
Many brands tend to over-complicate their storage and fulfillment operations with more SKUs than necessary. Keeping your SKU count down and manageable will not only reduce those costs, but also assist in inventory forecasting.
Having excessive varieties of the same product only makes inventory management and holding costs increase, and clouds inventory decision making. Make your ecommerce product lines simple to understand, manage, and sell.
Encourage Larger Purchases
When interacting with wholesalers or retailers, your ecommerce business can require an M.O.Q. for bulk buyers to ensure you’re making a profit. An M.O.Q. can also provide an opportunity to offer volume-buy discounts to lower the individual cost of each purchased unit, while increasing the total dollar amount spent.
This strategy also applies directly to shipping discounts, such as offering free shipping on any order over your M.O.Q. or dollar amount for the entire purchase.
Sell Out Faster
Ordering more inventory incentivizes selling quickly (having a high inventory turnover rate). With more inventory comes more pressure to sell quickly due to the larger inventory costs on the front-end.
A minimum order quantity that is too high (that’s attempting to fix large amounts of held inventory) will only turn off the interest of customers due to ridiculous minimum purchase amounts. If someone needs one of your products, but you require them to buy five at the minimum, you’ll end up keeping the one you would’ve sold, along with the extra four your minimum order required, a lose-lose.
Mix Up Your Inventory Ordering
There’s no shame in trying to mix, match, and transform an agreement to find an agreeable M.O.Q. Try mixing up inventory orders to solve the minimum order concerns from a supplier or manufacturer. Also try asking if they have any of your products from other orders that were cancelled.
Find Another Partner
If your potential partner or manufacturer has an M.O.Q. that’s just too high, walk away. There is no harm in trying to negotiate with the manufacturer but finding another possible partner or even a wholesale distributor is a completely legitimate alternative to getting into an M.O.Q. standoff.
Develop Trust With Your Supplier
As your business grows so do your manufacturing needs, and if that growth occurs with the same manufacturer, their trust and willingness to adapt their requirements to satisfy a long-time partner may work out for both your business and the supplier. Flexibility with a supplier is built over time and consistency.
Successfully Install Minimum Order Quantities With Product Fulfillment Solutions
Real-Time Information And Management
Product Fulfillment Solutions offers 24/7 access to your inventory in real time. Their programs and software packages allow you to manage your demand forecasts, minimum order quantities, and all other logistical decisions at any time. The ability to adjust on the fly with demand and changes in terms with manufacturers and customers is a key factor in success.
Strategic Inventory Distribution
With warehouse locations in Ohio and Nevada, PFS is strategically positioned to make both international and domestic inventory distribution a breeze. PFS is able to properly address regulations, customs, and other shipping requirements to expand your ecommerce business internationally.
A minimum order quantity can be a double-edged sword when it comes to running your ecommerce business. On one hand, having your own minimum order quantity ensures that every order will be making a profit, and that inventory is managed in an efficient and orderly manner. On the other hand, dealing with suppliers’ M.O.Q. requirements may create difficulties in finding a supplier that allows you to purchase inventory at a cost and quantity that suits your ecommerce business.
Minimum order quantities will vary across businesses, but with careful identification and detailed investigating on different factors including demand and holding costs, finding the right M.O.Q. for your business is in reach.
The Four Steps To Calculate Minimum Order Quantity
- Determine Demand
- Calculate Your Break-Even Point
- Be Aware Of Holding Costs
- Find Your M.O.Q.
When Should We Have An M.O.Q.?
When your company needs to ensure it’s making the proper profit margins on your sales, implementing an M.O.Q. eliminates orders that will not net you a profit. They have the potential to drive off smaller-than-required sales, but that is the inherent risk in establishing an M.O.Q. for your ecommerce business.
M.O.Q. vs E.O.Q.?
M.O.Q. is the minimum order quantity for profit, which may be used either by a business or manufacturer, while the E.O.Q., or economic order quantity, is the ideal level of inventory to be purchased and stocked to avoid extraneous inventory and storage costs.
Want a personalized consultation to discover what 3PL solutions can do for your business? Contact PFS today!