MOQ (Minimum Order Quantity) for Beginners

Have you ever heard about MOQ when you want to order goods from China? Don’t worry, it’s not something you need to be afraid of.

Minimum Order Quantity is a common phrase in international trade, especially in wholesale businesses. It’s actually the minimum amount of goods a business is willing to provide.

Beginners might ask why they don’t sell less than MOQ. If you’re one of those beginners who want to learn MOQ, you’ve come to the right place. Here at DDPCH, we’ll help you master MOQ and all the tips and tricks about it.

So read the following article to see what MOQ is and if you have any other questions, don’t hesitate to contact our team.

Definition of Minimum Order Quantity (MOQ)

Here is the simplest definition of MOQ: The Minimum Order Quantity is the minimum number of units a supplier (seller) is willing to sell in a single order.

In other words, it’s a threshold you need to meet if you want to purchase from that seller. You can consider MOQ as an initial condition or a gatekeeper at a wholesale store. The shop only allows entry if you want to buy a certain amount of product. 

For example, you might find a supplier in China that sells custom t-shirts. Usually, this type of business defines an MOQ for buyers. If they set an MOQ of 100 units, you can’t buy just one or two shirts.

MOQ is essential in manufacturing and wholesale businesses because they have to ensure profitability and efficient inventory management by getting enough orders. 

MOQ can be applied to both individual items or the total value of an order. For example, consider a supplier that offers a variety of office goods like pens, pencils, notebooks, etc.

The supplier might give you two options:

1. An MOQ of 50 units for a specific type of pen
2. A minimum order value of $200 for a single order including several items

MOQ Benefits for Suppliers and Buyers

You might consider MOQs an obstacle in your way. However, defining an MOQ has significant advantages for both the supplier and you as a buyer.

Here are the most important advantages of MOQ for sellers and buyers:

Benefits for Suppliers

1. Stable Revenue Stream: The most important advantage of defining Minimum Order Quantity for a business is that it guarantees a minimum level of sales for each production cycle. This way, the supplier can forecast its revenue more accurately and plan its finances with a higher level of confidence.

2. Inventory Management: Another essential benefit of setting MOQs is optimizing their inventory levels. In other words, if the business knows its Minimum Order Quantity, it produces only what’s guaranteed to be sold. This way, it minimizes the risk of excess stock and storage costs.

3. Production Efficiency: Last but not least, MOQs help manufacturers keep an efficient production streamline. Setting MOQs lets suppliers manufacture larger quantities at once and reduce setup times. This way, the production costs per unit will significantly decrease.

Benefits for Buyers

1. Cost Savings: Defining MOQs often leads to lower production costs per unit, and therefore, you can buy it at a lower price. Suppliers can also offer bulk discounts to buyers who meet their MOQs.

2. Strategic Partnerships: If you continue buying at bulk volumes, you’ll gradually build a strong partnership with the supplier. This can also lead to lower prices and better customer service. There might be some other benefits like priority access to new products, which is important when you want to outperform your competitors.

3. Stable Supply: MOQs can ensure a stable supply chain and help you fulfil your inventory. In simple words, you can always be sure that you have your products because the seller has bulk orders in the production line.

5 Simple Steps to Calculate Your MOQ

Now that you’re familiar with the definition of MOQ, it’s time to calculate the ideal MOQ. If you want to make efficient purchasing decisions, you need to master this calculation.

Optimizing the MOQ helps you balance factors like cost savings, inventory management, and meeting supplier requirements. 

Here at DDPCH, we’ve tried to break down the calculations of MOQ so that a beginner can easily determine its ideal order quantity:

Step 1: Determine Your Fixed Costs

As it comes from the name, fixed costs are expenses that remain constant in your orders. It means that these costs are irrelevant to the number of units you order.

Fixed costs typically include:

• Rent or mortgage: you’re paying a constant amount of money for your storage space.
• Salaries: you have a constant number of employees for your warehouse or logistics.
• Utilities: your storage facility consumes a fixed amount of energy.
• Insurance: you can get a fixed insurance on your inventory.
• Administrative costs: you have some constant costs associated with the order process.

You need to have a spreadsheet to gather data for each fixed cost category. It’s essential to list them over a specific period (e.g., month, quarter). Then, you can determine your total fixed cost.

Step 2: Identify Your Variable Costs per Unit

Variable costs are expenses that are directly dependent on the number of units you purchase.

Here are the most important variable costs:

• Price: cost of the product itself from the supplier.
• Shipping: shipping costs are dependent on the number of units you order.
• Packaging: packing also varies by the amount of products.
• Labor: the more you purchase the more workers you need.

You need to determine these costs per unit. Remember that you might have to get quotes from different suppliers to choose the best deal.

Step 3: Set Your Desired Profit Margin per Unit

The next step is to determine the percentage of profit you want to achieve on each unit sold. In fact, you have to know how much higher you can sell the product you’re purchasing from China.

Your desired profit per unit directly impacts your selling price in the market and the overall profitability of your cargo.

Before determining this profit, you have to analyze your market and competitor pricing. Remember that the desired profit level should be a realistic and achievable margin per unit.

Step 4: Calculate Your Break-Even Point

You might have been familiar with this concept. The break-even point is the quantity of units you need to sell to cover all your costs: both fixed and variable.

Of course, this is the point at which you make no profit. Here’s the formula to calculate your break-even point:

Break-Even Point (Units) = Total Fixed Costs / (Selling Price per Unit – Variable Cost per Unit)

The break-even point provides a baseline from which you can calculate your profit.

Step 5: Adjust for Desired Profit and Market Conditions

Now, you have to increase the break-even point quantity by adding the percentage you want to earn as profit per unit.

You have to consider many economic conditions to be able to calculate the optimum point. Remember that if you increase the price, you might lose your customers.

Here are some market considerations for calculating your MOQ and profit:

• Supplier MOQ: Suppliers have their own minimum order requirements. You have to make sure that your calculated MOQ meets or even exceeds theirs.

• Lead Time: Estimate the time it takes to receive new inventory from the supplier. You might need a higher MOQ to have sufficient stock and avoid stock outs.

• Storage Capacity: Your final MOQ should align with your storage space. Always consider your storage limitations.

• Demand Fluctuations: You have to consider a lower MOQ for products that have seasonal fluctuations.

Example of Calculating MOQ

Let’s suppose that you’re starting a small online business and you want to sell custom phone cases. Here are the steps to calculate MOQ:

• Step 1: Total Fixed Costs is $1,000 per month
• Step 2: Variable Cost per Unit is $5 (includes cost of phone case, packaging, and shipping)
• Step 3: Desired Profit Margin is 20%
• Step 4: Break-Even Point (Units) = $1,000 / ($8 – $5) = $1,000 / $3 = 333.33 units 

It’s good to round up the break-even point to 334 units.

• Step 5: To achieve a 20% profit margin, you’d sell each phone case for $6. This includes variable costs + desired profits.

Therefore, a more profitable MOQ would be:

Adjusted MOQ = Break-Even Point * (1 + Desired Profit Margin)

 = 334 units * (1 + 0.20)

 = 400.8 units

By a round-up, we can have 401 units as the MOQ.

Conclusion

Learning the concept of MOQ (Minimum Order Quantity) and mastering its calculations have many advantages for you. As a shipping company, DDPCH tries to give as much information about details of trading as possible. This article was an example of our dedication to give unique experiences to newcomers. After reading this blog post, you can now understand MOQs and their impact on your business. Try to calculate your ideal MOQ for several different orders and see the cost savings and other results. If you still have questions about MOQ and other shipping problems, don’t hesitate to call DDPCH.

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