Having the right amount of inventory is vital to sustaining a business. You need to meet demand, but you don’t want to hold onto stock you can’t sell. In a perfect world, you would set up reorders on a schedule, and in quantities exactly designed to meet customer needs. Purchasing, however, isn’t always that simple.
It’s enough of a challenge to find suppliers who sell exactly what you need at a fair price. Many manufacturers and suppliers also set minimum order quantities (MOQs) to ensure they’re making a profit.
This can be an obstacle—or an opportunity. In this article, you’ll learn what an MOQ is, the impact of MOQs on your inventory, the benefits of MOQs, how suppliers calculate MOQs, and tips for optimizing MOQs.
What is minimum order quantity (MOQ)?
Minimum order quantity is the smallest number of products that you must purchase in one order from a supplier. Suppliers set MOQs to avoid wasting resources on orders that deliver them little or no profit.
MOQ can be based on the number of units or the total order value. Here’s an example:
You buy pens at $.20 each. Your supplier’s MOQ for pens is 1,000 units. This means you’ll have to spend a minimum of $200 on pens per order.
Different types of products will require different MOQs; an item that costs a lot to produce is likely to have a lower MOQ than products that are easy and cheap to produce.
Difference between MOQ and EOQ
Understanding the differences between MOQ and EOQ (economic order quantity) is essential for making informed purchasing decisions. While MOQ is dictated by your supplier’s constraints, EOQ is determined by your business’s need to balance costs and meet customer demand efficiently.
It’s the ideal order size that minimizes the total cost of inventory. This includes costs such as ordering, holding, and shortage costs. Calculating EOQ helps you determine the most cost-effective quantity to order, balancing between ordering too much and facing high holding costs and ordering too little, leading to stockouts and potential lost sales.
By strategically managing these two metrics, you can optimize inventory levels, reduce costs, and maintain a smooth supply chain, ultimately contributing to the success and profitability of your retail business.
Manage inventory from one back office
Shopify POS comes with tools to help you manage warehouse and store inventory in one place. Forecast demand, set low stock alerts, create purchase orders, know which items are selling or sitting on shelves, count inventory, and more.
Why do suppliers use MOQ?
Suppliers implement minimum order quantities for several strategic and operational reasons, all aimed at ensuring their business’s sustainability and efficiency.
- Covering production costs and ensuring profitability. Suppliers set MOQs to ensure that each order covers their fixed production costs like labor, materials, and machinery setup, maintaining their profitability.
- Streamlining the production process. By producing larger, consistent quantities, suppliers optimize manufacturing efficiency, reduce waste, and manage resources more effectively.
- Enhancing quality control and speed. Higher, consistent production volumes allow for better quality control and quicker turnaround times, ensuring a reliable supply of goods for customers.
- Maintaining business viability. MOQs ensure that every order contributes positively to the supplier’s bottom line, making their business model sustainable.
- Creating mutually beneficial relationships. MOQs help suppliers build better relationships with factories and with business owners like you, thanks to consistent production processes, quality, and lead times.
What is the impact of minimum order quantity on inventory?
Supplier MOQs, both high and low, will have a major impact on your inventory. They will affect the number of days you hold stock, the frequency of your purchase orders, and the space available in your warehouse. If you can’t meet your supplier’s MOQ, you may have to look elsewhere or pay a surcharge to purchase less than the minimum order quantity.
If you work with suppliers that have high MOQs, you’ll need to order a sizable amount of inventory, which might involve longer lead times. Due to the larger order requirements, your stock will take up more space in whichever inventory storage solution you use and also tie up a substantial chunk of your working capital. You also run the risk of holding onto the stock for too long, making it obsolete.
The plus side is that your administrative costs will be lower, as your orders will need to be placed less frequently. You’ll also have more opportunities to buy bulk quantities at lower prices, and there will be less chance of running out of stock.
Ordering products from suppliers with low MOQs means you’ll have less inventory on hand, but—depending on customer demand—you may need to restock more often, potentially increasing administrative or shipping costs. When ordering small inventory quantities, there’s also the risk of not having enough stock on hand. In unanticipated moments of high demand, you may lose out on sales.
💡 PRO TIP: Want to take the guesswork out of restocking? Set reorder points in Shopify Admin to get low stock notifications and ensure you have enough lead time to replenish inventory of a product before quantities reach zero.
But a low MOQ reduces your working capital investment. This way of working also decreases the chance of your stock becoming obsolete or irrelevant over time. Typically, low MOQ products will have higher margins.
Benefits of MOQs
MOQs are not only beneficial in helping suppliers maintain healthy profit margins, but they can also help you improve inventory control and keep purchasing costs down.
Let’s take a look at more benefits:
Benefits for suppliers
- Better cash flow. When setting MOQs, suppliers take their total cost of inventory into account and pair it with any other expenses they have to pay before reaching the desired profit level. When this is managed well, their cash flow is healthier and more predictable.
- Reduced inventory costs. Some suppliers don’t even produce goods until a buyer who can meet their MOQ makes a purchase. This keeps stock out of their warehouse and reduces both inventory and manufacturing costs.
- Increased profit margins. As noted, supplier MOQs are usually set up in a way that ensures a certain profit margin. Often, they will only order new stock when their sales reach a level that creates an operating profit. This means that even a relatively low MOQ will offer the safety net they need.
Benefits for buyers
- Saving on bulk purchases. If you work with suppliers that have MOQs, you’ll know you’re getting the best price per unit. Buying products in bulk results in savings and more profit on each unit sold.
- Enhanced relationships with suppliers. Your ideal purchase quantity may differ from your supplier’s MOQ. This means you’ll need to work with your supplier to reach a solution. These negotiations can create stronger relationships.
Types of MOQs
MOQs can be simple or complex. Your supplier will have different economic constraints associated with your orders depending on the products they sell: Machinery, materials, shipment costs, bookkeeping costs, and billing costs are just a few examples.
MOQs will either have a limit on one constraint or on multiple constraints. Simple MOQs usually have just one lower limit. As noted, this will usually be a minimum value or quantity of units.
Complex MOQs, on the other hand, have multiple limits. These can include the costs discussed above as well as minimum amounts of parts or materials.
As the name suggests, simple MOQs are easy to understand. You’ll need to agree on a minimum spend or minimum quantities before you place an order with your supplier.
A perfect example of this might be a supplier of personalized merchandise. It wouldn’t be worth the resources needed to add a logo or color scheme to a mug or a pen if the buyer was only looking to purchase a small number of items.
Two or more requirements will be in place when you’re looking to buy from a supplier with a complex MOQ. You might have to reach a minimum quantity of units as well as a minimum order value, and the requirements might be even more complex than that.
For example, let’s say you’re sourcing fabric for your clothing line; the supplier might require an MOQ in yards or meters of fabric per color. They will set up an MOQ that takes minimum spend, minimum quantities, and minimum measurements of fabrics into account. As the buyer, you’ll need to match all the conditions to be able to place an order.
How to calculate minimum order quantity
As a retailer, especially if you design and manufacture your own products for in-store or online sales, you might find yourself setting MOQs for wholesale orders to other retailers. It’s crucial to understand how MOQs are calculated, as they can vary significantly based on industry and product type. Factors like fluctuating raw material costs and component part prices mean that MOQs aren’t static. Suppliers gather extensive data to pinpoint the MOQ that maximizes profitability, considering various key parameters in their calculations. This knowledge can also help you anticipate and adapt to changes in your purchasing conditions.
- Determine demand
- Calculate holding costs
- Find the break-even point
- Set minimum order quantity
1. Determine demand
Demand will vary and be influenced by a variety of factors, including product type, competition, and seasonality. Suppliers review historical data to forecast demand and use it to define the inventory quantities needed to satisfy market fluctuations.
💡 PRO TIP: Want to know how much stock to order from a vendor? If you’re using Shopify POS, install the Stocky app to get purchase order suggestions based on historical sales data or a product’s seasonality.
2. Calculate holding costs
Depending on the products sold and their storage requirements, the costs to store products (also known as inventory carrying costs) will vary. Refrigeration, for example, will incur energy costs, and odd-shaped items may take up extra space.
No matter the variations, suppliers will not want to store products for too long, as their finances will benefit from a quicker turnaround. This is worth remembering when you’re looking for deals.
3. Find the break-even point
Whether you want to set minimum order quantities for wholesale purchases of your products or understand when you’ve earned back customer-acquisition costs for direct-to-consumer orders, knowing your break-even point is key. This is when your product sales (or your supplier’s sales) are equal to business expenses.
When it comes to MOQs, suppliers consider how many items they need to sell before they can break even and eventually make a profit. Their costs generally include the price of materials or supplies as well as labor costs, storage costs, customer acquisition costs, and anything else directly connected to a sale.
💡 PRO TIP: Only Shopify POS unifies your online and retail store data into one back office—including customer data, inventory, sales, and more. View easy-to-understand reports to spot trends faster, capitalize on opportunities, and jumpstart your brand’s growth.
4. Set minimum order quantity
Once suppliers determine demand, calculate holding costs, and find a break-even point, they set their MOQs for each product type. Having this in place weeds out customers who want to buy lower quantities, which leads to unprofitable orders.
To persuade their customers to buy in higher quantities, suppliers sometimes offer incentives like bulk-buying discounts. This helps their inventory management and your bottom line.
Tips for optimizing MOQs
- Free shipping thresholds for customers
- Create incentives to spend more
- Remove slow-moving stock
- Regularly review supplier relationships
- Automate with technology
As we learned earlier, there are a few benefits of having MOQs. But if you’re required to purchase a certain quantity from suppliers, you’ll also want to make sure that your customers are incentivized to buy from you, your stock is fast-moving, and you’re getting the best possible deals from your suppliers.
Here, we’ll look at some tips to optimize your MOQs:
Free shipping thresholds for customers
Shipping orders to customers for free after they spend a certain amount is known as a free shipping threshold. It’s a marketing strategy that can lead to increased conversions.
To advertise this incentive, you could add a banner to your website that says, “Spend $50 and enjoy free shipping.” Or you could convert first-time buyers by offering to ship their first order for free.
Another example could be to charge shipping until the customer reaches a specific number of orders, and then give them free shipping on their next order. Regardless of the strategy you use, offering free shipping can help increase sales and improve inventory management.
Create incentives to spend more
You can encourage end-consumers to spend more with incentives like lower prices for items purchased in multiples or create product bundles to increase average order values. This strategy of reducing the per-item price if the customer buys more is one way to move inventory faster.
And if you’re selling your products to retailers at wholesale, you can set an MOQ per style or collection, but also create tiers. For example, buy 10 pairs of jeans and the cost is $10 per pair, buy 20 pairs of jeans and the cost is $8 per pair, or buy 30 pairs of jeans and the cost is $6 per pair. The more units the retailer purchases, the less it will cost per pair—and the higher the margins will be.
Remove slow-moving stock
As we mentioned earlier, the cost of storing stock will vary depending on the product type. No matter what items you’re selling, however, holding on to stock for too long will always eat into your profits.
Keep a close eye on which products are selling quickly and which products are sitting in storage for a long time. It’s much easier and more cost-effective to manage fewer items.
If you’re not selling a particular color or variation of a product type, do you need to keep it in your inventory? You can run a promotion to try to get rid of the dead stock and in the future, look to buy alternatives or look for a supplier with a lower MOQ.
💡 PRO TIP: To see the sell-through rate of the products you carry, view the Sell-through rate by product report in Shopify admin.
Regularly review supplier relationships
Some suppliers increase their MOQs or have a price point that makes it difficult for you to make a profit. If you have a strong relationship with them, your best option is usually to negotiate via supplier relationship management. But when that becomes impossible, it’s time to look at other options.
PRO TIP: Always try to negotiate supplier pricing before you start the relationship (even if it’s $1 or a few cents less than the listed price). The supplier is likely expecting some negotiations, and they will set the tone for your relationship. The worst-case scenario is that the supplier will say no.
Automate with technology
ERP (enterprise resource planning) and MRP (material requirements planning) platforms have automation at their core. Using the analytics these platforms offer makes it easier to manage your purchases and keep track of supplier MOQs. And because the software provides near real-time data, you can quickly change your buying habits to meet current needs.
Use MOQ to your advantage
Now that you know what MOQs are, how they’re calculated, and the impact of high and low MOQs on your inventory, you’re ready to start sourcing suppliers, negotiate pricing, and build long-term relationships.
Unify your inventory management with Shopify
Only Shopify POS helps you manage warehouse and retail store inventory from the same back office. Shopify automatically syncs stock quantities as you receive, sell, return, or exchange products online or in store—no manual reconciling necessary.
Minimum order quantity FAQ
How do you establish minimum order quantity?
- Take Inventory: Before you can determine a minimum order quantity, you need to know what your inventory levels are. Take a full inventory of the items you’re looking to order and determine how much you have in stock.
- Analyze Demand: After you know your inventory levels, analyze how much of the item you’re selling. Look at your sales data to get an idea of what the average demand is for the item and how often you need to replenish your stock.
- Set Reorder Point: Use the inventory and demand information to set a reorder point. This is the point at which you will need to replenish your stock.
- Calculate Lead Time: Lead time is the amount of time it takes for you to receive your order. Consider how long it typically takes for your supplier to deliver the item and factor in any additional time needed for processing or customization.
- Determine Minimum Order Quantity: Once you have all the information, you can determine the minimum order quantity. This is the lowest amount of the item you need to order to restock the item.
What is the formula to calculate MOQ?
MOQ (Minimum Order Quantity) is typically calculated by dividing the total cost of the order by the unit cost of the product. The formula for this is: MOQ = Total Cost of Order / Unit Cost of Product
What is the difference between EOQ and MOQ?
EOQ stands for Economic Order Quantity and is the quantity of an item that should be ordered to minimize ordering and holding costs. MOQ stands for Minimum Order Quantity and is the smallest number of items a supplier will accept for an order. EOQ is based on the cost of ordering and holding, while MOQ is based on the supplier’s requirements.