Inventory is essential to your business. And proper inventory management helps to ensure that you have enough products on hand to fulfill customer orders without maintaining an excessive supply. When you're assembling your final goods to bring to market, you'll deal with an array of suppliers. In many cases, manufacturers have a minimum order quantity (MOQ) that you must purchase to get the supplies you need. On the other end, you may also use a form of MOQ to encourage customers to buy more at one time to reduce inefficient shipping costs. Learn how an ecommerce fulfillment provider can help you to benefit from your own or your suppliers' MOQs.
Minimum order quantity is the smallest number of units that a supplier or company wants to sell at one time. For most ecommerce and direct-to-consumer brands, MOQs come into play when ordering supplies and raw materials from vendors and suppliers. Direct MOQs are often more common in business-to-business transactions; although, other forms of minimum order quantities can also be directed toward the end user or a retailer that wants to carry your products.
For example, you may have to buy a certain number of units of the same SKU, or the same specific item, when making an order for a component of your finalized product. Other suppliers may require you to spend a certain amount before your order can be shipped.
Some MOQs can be more complex and require you to purchase a minimum number of items, spend a minimum amount, and meet other minimum requirements before placing an order. Screen printed and personalized items are one common example because they often have relatively high individual setup costs that are significantly reduced with larger orders.
Businesses use a variety of tools to calculate their MOQs, depending on their audience, the specifics of a certain product, and their own profitability. In addition, MOQs can also serve as an incentive to purchase a larger quantity of a product or to manage your inventory differently. You may be able to purchase a single SKU but pay a higher per-unit cost under a certain set MOQ. Similarly, in your own ecommerce transactions, you may offer customers free shipping or other incentives when they spend a certain amount, a form of MOQ that can help to reduce inefficiency.
By understanding how MOQs are calculated, you can work with your suppliers and make decisions about how you sell to retailers as well as customers. In general, MOQs are designed to help a business maximize profitability and reduce inefficiency. Here are some steps that ecommerce companies and suppliers take when calculating MOQs.
Demand over time can be influenced by the type of product being sold, historical data about the number of items sold, customer requests, the time of year, and the number of competitors marketing the same products. Demand management involves forecasting over time and determining how the goods will be stored and sold. This is not only part of the supplier's calculation. Thinking about your own future demands and the number of finished products you want to have on hand can help you decide whether to make a larger purchase or pay a higher per-unit cost for a particular good.
In addition to the demand for the products, you'll also want to consider the costs of holding the products, including energy expenses, warehousing costs, and fulfillment expenses from working with a third-party logistics (3PL) or fourth-party logistics (4PL) provider. Both direct-to-consumer businesses and their suppliers want to avoid old SKUs and items sitting around on the shelf accruing costs, while also making sure they meet their buyers' demand. If you understand how much each item costs when produced individually or in bulk, you can determine a fair price per order and MOQ.
Break-even costs help you to set MOQs for wholesale purchases or determine whether you are making back the money that you have spent to acquire new customers. You break even when your product sales, or those of your supplier, are equal to the expenses of running the business, including producing and maintaining the goods. Suppliers determine how much they need to sell before they can break even and eventually turn a profit. For example, specialized items may require cutting a die or creating a screen for printing. The costs of creating these original resources must be recouped to hit the break-even point.
Businesses use these three criteria to set MOQs for each type of product, avoiding inefficient or unprofitable orders. A soft MOQ can be an incentive to buy more at one time, including reduced shipping costs and discounts for buying a larger quantity of goods.
Suppliers use MOQs because economies of scale affect their business. It is often far more expensive to make one single item on a per-unit basis than it is to make hundreds or thousands of the same item, given initial set-up costs. In short, suppliers want to maximize their profits and reduce inefficiencies. Some suppliers focus on business-to-business rather than direct-to-consumer transactions, and their MOQs help them to ensure that they’re reaching their desired audiences.
Similarly, you may want to use a form of MOQ to increase your own efficiency. Certain types of items may only be available in sets, or you may offer your customers reduced or free shipping when they purchase a certain amount. All these calculations are determined by your business's break-even point and profitability goals.
When you have to meet MOQs in order to purchase from your suppliers, you may also want to incentivize your customers to buy more at the same time, for exactly the same reason your manufacturers do. Here are some tips that you can use to implement MOQs and work with your suppliers' requirements:
“Airhouse provides a step way beyond white-glove customer service. In essence, you’re buying into not just the service level capabilities, but also years and years'—I mean decades'—worth of high-level ecommerce experience that you can then lean on.”
A 4PL provides thorough logistics and supply chain services, helping you ensure your customers receive their items with complete end-to-end management. Fulfillment providers like Airhouse often do not require you to store a certain amount of goods before you can begin using the service. Connect with one of our fulfillment experts to learn more about managing MOQs and how you can improve profitability and reduce costs while increasing customer satisfaction.
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