Minimum order quantity: what it is and how to use it in inventory management
Whether it is a small scale business or a multinational company, inventory management is the most important activity in a company. A business always tries to keep its firm from overstocking or situations of dead inventory.
In this article, we will learn what is the minimum order quantity and how it can be used for efficient inventory management.
What is the Minimum Order Quantity (MOQ)?
MOQ stands for minimum order quantity which is the minimum amount of stock a supplier is willing to sell. The Minimum Order
Quantity is specified by the supplier to the buyers and vary from supplier to supplier.
Minimum Order Quantity is decided by the supplier keeping the percentage of profit in mind. Minimum Order Quantity differs from supplier to supplier or also according to the size of the business. This quantity can be negotiated by the buyers or sometimes it can be decreased intentionally to gain new customers.
It is often defined by the number of units produced in a production line.
What kind of supplier uses the concept of MOQ?
Minimum Order Quantity is the minimum quality that a supplier is willing to sell. It is decided based on the production cost incurred in manufacturing the quantity in MOQ. There is a minimum fixed cost associated with the production of a particular quantity. Minimum Order Quantity is set based on the amount that would be made on the sale of these quantities to cover the fixed cost as well as make a reasonable profit.
Wholesalers also dictate Minimum Order Quantity to plan their shipment and logistic cost.
Why is MOQ important for a Retailer?
MOQ directly impacts the quantity you purchase from the suppliers. Retailers need to make sure that they are aware of the Minimum Order Quantity for each product that they order from the supplier. If you order less than the Minimum Order Quantity then the supplier may choose not to honour the purchase order or worst you may end up paying more for the purchase.
MOQ has a direct impact on the re-order levels that you set for products. The reorder quantity should not only cover the minimum days of cover you plan for the product but should also be at least equal to the Minimum Order Quantity specified by the vendor.
MOQ also impacts your inventory turnover. It dictates that you purchase those minimal orders and this sits in your inventory until you are able to sell it. So you need to be careful while placing your purchase orders as it will impact your inventory carrying cost and also increase your inventory turnover if you are not able to sell the inventory fast enough.
How to deal with MOQ while placing inventory purchase orders?
Minimum Order Quantity is one of the metrics that need to be taken into account while placing an inventory purchase order.
Here are some tips which will help you deal with MOQ as a buyer.
– If you want to play safe even with MOQ, you should start by attempting to negotiate a lower price.
– Negotiate if possible to reduce the MOQ with the vendor. While this may be difficult, it may be possible to get the MOQ reduced which can help you lower your purchase cost and help maintain lean inventory.
– Consider placing an order with trading companies. These companies pool purchase orders from different retailers and in turn procure from the supplier. Trading companies leverage economies of scale to negotiate better rates from the supplier.
– Use an inventory management system with built-in intelligence to forecast your demands and use that intelligence to plan your purchase quantity. Easyops come with intelligent stock movement analytics that gives you a dynamic reorder level based on your selling velocity. You can use this intelligence to plan your purchases.
As a seller, you should consider the Minimum Order Quantity in the context of reorder levels and inventory turnover. In order to maintain a healthy interval turnover, one must make sure that the Minimum Order Quantity does not end up increasing your inventory and in turn your inventory holding a cost. Unless you are dealing with a very small inventory and you should be investing in a cloud-based inventory management system like Easyops to help you out with these calculations.
What is Economic Order Quantity (EOQ)?
EOQ stands for economic order quantity. The quantity that minimizes the total holding cost and ordering cost is known as EOQ. This classic model was developed by Ford W Harris in 1913. This concept can only be put into practice when the demand for a product is constant over a year.
This single item formula is used to find the minimum point of the following cost function:
TC (total cost)= PC (purchase cost of production cost) + (HC) holding cost.
EOQ is one of the oldest models which helps in minimizing the total holding.
Moving ahead with MOQ for Inventory Management
We hope that you have understood the importance of Minimum Order Quantity and how it impacts your inventory management. Do let us know in the comment section below about your take on MOQ and EOQ.
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