One of the pillars of running a successful business is managing inventory. Especially when it comes to e-commerce, where managing inventory is also the most challenging part of the business, the art of purchase orders is a must for everyone.
Ideally, a business needs as much inventory to remain an asset and satisfies the demands, but not so much where it becomes a liability and is difficult to sell through. The art of purchase orders is difficult to master.
You need to buy the inventory at the optimal price and first find the manufacturer who can deliver the required supplies.
What is minimum order quantity?
Minimum Order Quantity (MOQ) is a system used by manufacturers to sell enough and stay profitable. For example, it might not be convenient or profitable for the shopkeeper to sell you the 100 grams of rice you consume every day.
Instead, they’ll create a MOQ of 1 Kg of rice and sell it to you every 10 days. Of course, the desired MOQ for the supplier and the business may be different, so it is important to choose the right partner.
Basically, the Minimum Order Quantity (MOQ) is the fewest units agreed by the supplier, purchased simultaneously. In e-commerce, it is generally the smallest amount of inventory you can buy from the supplier at a given time.
How to calculate minimum order quantity?
There is not a fixed amount or a fixed formula to calculate MOQ. Every supplier has different challenges and business needs, and the MOQ is set up accordingly. While buying from their suppliers, businesses need to decide whether they want a lower MOQ with a higher price or vice versa.
The more you buy from the suppliers, the easier for them to lower costs on individual items, and therefore this system is in place. Even though there is no fixed amount or formula to calculate MOQ, a few points should be kept in mind while deciding the ideal MOQ.
Figuring out the demand
Demand and inventory forecasting go hand in hand. Both are dependent on each other. Both the suppliers and the purchasers need to forecast the total number of units they wish to transact to come up with a minimum order quantity.
The bigger the number of items being purchased, the lower the MOQ might be from the supplier. However, a minimum MOQ is given by a supplier, below which they won’t go how large the order may be.
Knowing the break-even point
The Break-even point is the price at which there’s no profit or loss to the supplier. If a supplier buys a product for Rs. 10 and sells it further at the same price, the supplier will be considered to achieve break-even.
It is essential to know the break-even point of a transaction because that provides the baseline for MOQ. MOQs in almost all cases is above the point at which the suppliers hit break even.
Saying that no purchaser will ever buy a product from a supplier below the value conceives the same product. Therefore, the economics of the transaction also drive the MOQ.
Conscious of the holding cost
Even maintaining an inventory requires the costs of their own. Therefore, to reduce these costs, a supplier wants to hold as few inventory items as possible. Holding costs also play an important role in determining the MOQ.
The more inventory a supplier has, the more inclined they will be to sell them through. Therefore high holding costs might lead to bigger MOQs.
Creating a strategy
Even though historical sales data, break-even points, holding costs, and the demand requirements make it easier to calculate the MOQ, a business requires a proper strategy to get the ideal MOQ.
Business relations and supply chain management play a vital role in calculating the ideal MOQ. A supplier would want as big a MOQ as possible to lower its cost, but it is up to the purchaser to negotiate well. Since there are no fixed standards for MOQ, the MOQs generally vary from transaction to transaction.
The other challenging thing while forming a strategy on MOQ is the use of the data available. Even with holding cost, break-even, demand, etc., it is difficult to figure out the weightage for each of the factors. It all comes down to the financial strategies the supplier has in the long run.
Tips on navigating minimum order quantity
Here are a few tips to help you choose the right MOQ.
It is okay to negotiate on price
Determining MOQs requires forecasting, which requires human intelligence to counter. Although there are limits to how much you can negotiate, there is always the liberty to get better deals.
One should always be open to finding better deals online. The wholesale business is competitive, and one should always look for easier alternatives. The recent inventory boom in India has allowed small retailers and suppliers to transact through longer distances, giving better prices.
Building professional relationships with your transaction counterparts will always work for you in the long run. Your friend may cut you a better deal. Building good relationships while transacting can also allow changing the structure of the MOQs.
Remove Slow Moving SKUs
Stock Keeping Units (SKUs), if not managed properly, can severely affect the handling costs. It is essential to eliminate the slow-moving SKUs in the system to better deal with the Minimum Order Quantity. It is often seen that brands, especially the new ones, build up more SKUs than they can manage, resulting in eventual losses and inventory management issues. It is one of the most important factors which people generally ignore.
It is equally important to get paid for your MOQ. The structuring of MOQs can sometimes be complicated, as it can require split payments or recurring payments. Razorpay Route is one of the trusted ways to pay your clients or suppliers. It is a hassle-free system that you must use for your payment concerns.
Figuring out MOQ is not science. It takes experience, logic, and negotiations, among other skills to finally be a pro at it. However, if you start, build your business with a base of trust, always look for better deals, and don’t be scared to negotiate.
MOQs are an efficient way to save costs and deliver products. Therefore, one must be very careful in deciding what the MOQ would be and look out for deals that you can trust.
Similarly, figuring out the right shipping strategies and ways to make your inventory management are vital for upscaling your business. That’s why with Razorpay Thirdwatch, business owners need not worry about RTO and CoD losses because the software tackles the hurdles with Artificial Intelligence and reduces order cancellations on your e-commerce store.
Introducing order confirmations on Thirdwatch!
To address the problem of flagging orders and sending confirmation messages to your customers, we are over the moon to launch and present our latest addition to the Thirdwatch suite- Order Confirmations!
Through order confirmations, online store owners can send confirmations or address correction messages for the orders that are deemed risky or have incomplete information in them.