Minimum Order Quantity or MOQ refers to the bare minimum number of units that can be produced by the supplier at a given time. This is done to cover the production cost, and to make sure that there is sufficient profit with each individual production run. It can sometimes be negotiable, although it varies from one supplier to another. Some will have low quantities (as low as 100 units), while others will have large MOQs. In short, MOQ should be planned in such a way that after all the expenditures in terms of time, money and energy are deducted, the outcome should be profitable.
Why Are MOQs Important?
For suppliers, MOQs are important since it can determine which businesses they are able to deal with. It also ensures easy communication between the two parties. A small-scale business will look for a supplier who can match their low MOQ requirement, while a large-scale business needs to find someone who can meet their demands, and have the necessary personnel and machinery to produce the required units.
Why Do Suppliers Need To Set Up A MOQ?
The reason behind setting up a Minimum Order Quantity is to cover the cost of production, while keeping track of inventory transactions. If they produce fewer units than the threshold, they may not be able to make profits. Another reason behind MOQ is the fact that the supplier can produce exactly that particular number of items in one production run.
Manufacturing something in bulk requires the purchase of bulk raw materials as well. No one will run their machinery and bear production costs, if the whole process is not time-effective or cost-effective. There should be some sort of security that the supplier will be compensated for a particular number of units. This is the reason why they set up the MOQ to match their production line requirements and to balance the books.
What Are The Merits And Demerits Of MOQs?
One of the biggest advantages that you get with the ‘Minimum Order Quantity’ concept is that you get the best price per unit being the threshold amount. This automatically implies that your expenditure for the product manufacturing process is less than the selling price of each unit. This also helps you know the true cost price of your product, and help you maximize your profits when you sell them.
On the other hand, the biggest drawback of MOQs is the upfront costs involved in producing the required units. Say for instance, 500 units at $20 per unit will cost you $10,000 to successfully complete the order. This can be a really tough and daunting task for a new business to comply with. Also, it does not cover the expenses related to doing business with the supplier. Such external expenses include the cost of important paperwork to be done in order to get the product through customs or the shipping costs incurred after the production run is over. The cost of manufacturing a certain item is only limited to its production, and it is the most important factor to take into account, when looking to set up MOQs. Make the most of your inventory, so you can emphasize on growing your business with lesser risks!