The minimum order quantity (MOQ) is a variable that greatly affects the entire inventory management. This means that inventory levels must be maintained and managed depending on whether the supplier’s MOQ is high or low. Let’s take a deeper look at how minimum order quantity (MOQ) affects purchase order frequency, days of inventory holding, and warehouse management.
High Minimum Order Quantity
If the minimum order quantity (MOQ) is high, suppliers must produce and stock large quantities of products to fulfil orders. On the other hand, buyers must assess whether they need and can maintain a high minimum order quantity of the product or not. The advantages and disadvantages of a high minimum order quantity are as follows:
Advantages
- Less chance of stock out
- Lower administrative costs as raw materials would have to be ordered less often
Disadvantages
- Inventory maintenance costs increase as more e-commerce warehouse space is needed
- Higher chance of the product becoming obsolete if inventory is not completely sold
Low Minimum Order Quantity (MOQ)
If the minimum order quantity (MOQ) set by the supplier is low, less inventory must be produced and maintained because the order size is smaller. At the same time, e-commerce sellers must assess whether a low minimum order quantity will meet their demand. In addition, sellers must check whether a low minimum order quantity is cost-effective, as inventory would have to be stored repeatedly, causing costs such as shipping fees.
Advantages
- Inventory maintenance costs are lower because less storage space is required
- Less chance of inventory being out of date
Disadvantages
- Higher administrative costs, such as shipping fees, as inventory, must be replenished frequently
- Greater risk of stock out
How to Calculate the Minimum Order Quantity (MOQ)?
There is no specific formula for calculating the minimum order quantity. Instead, it depends on characteristic factors such as demand, business size, location, sector of operation and more. This means that each e-commerce seller may have a different minimum order quantity.
You must be wondering how to calculate the minimum order quantity for your business; here are a few factors to consider when deciding on a minimum order quantity:
1. Estimate Demand
Inventory and demand go hand in hand when calculating the minimum order quantity; the higher the demand, the higher the minimum order quantity can be and vice versa. Product demand depends on product type, season, competition and customer preferences; it can be calculated using historical sales data.
A supplier’s minimum order quantity should be close to your demand, not too high so that you have unsold inventory, and not too low that you have to restock frequently as this increases expenses.
2. Calculate the Holding Costs
Holding costs refer to the cost of storing inventory in an e-commerce warehouse or fulfilment centre. The longer the inventory is stored, the higher the expenses. Therefore, it is cost-effective to store inventory for a short period of time.
By calculating your e-commerce inventory expenses, you can decide how much inventory can be maintained within your budget. When calculating, also consider special needs, such as refrigeration, which add to the cost of storing inventory.
3. Assess the Tipping Point
The break-even point is when the supplier has no net loss or profit, i.e. total expenditure equals total revenue. Therefore, the minimum order quantity should not be less than your break-even point, as this ensures that you do not incur losses. At the same time, the seller’s minimum order quantity should not be so high that it forces the buyer to buy from another e-commerce seller.