Understanding Minimum Order Quantity
Any business would love it if it’s suppliers provide the exact quantity of products as ordered, within the exact required time, without charging any extra cost for it. But the reality is different. In the real market, it is hard to place orders with suppliers. Most of the suppliers would expect businesses to place a minimum order quantity. Businesses have to consider all other factors also before they place an order. This minimum order quantity varies as per the product business order, the location of the delivery, location of the supplier (his warehouse), his cost-effectiveness, etc.
Let us explore this basic, yet crucial concept of placing a purchase order.
What Does A Minimum Order Quantity Mean?
MOQ or Minimum order quantity is the least possible order size that your suppliers accept. There are certain minimum numbers of units or the order value that you must consider if you are dealing with that supplier. Additionally, it is important that you place an up to date order for every product and mention it correctly in the books. Any error can cause delays and clashes, which a smart buyer and seller will always avoid.
Why Do Suppliers Insist on Having Minimum Order Quantities?
Yes, imposing the demand of minimum order quantity might make suppliers lose on some small yet loyal customers, suppliers need to ensure that they are making a profit from each transaction. Suppliers also need to take care of other costs like transportation, handling, warehousing, and other administrative costs to ensure that the product stays safe and gets delivered in the best form. These costs might not be high, but if the buyer places a small sized order, then it becomes hard for the supplier to niche all the costs for a small lot. This affects his profit margin, sometimes might make him insure losses. Hence, dealing below specific qualities does not make sense to many of the suppliers.
Impact Minimum Order Quantities Have On Your Inventory?
Minimum order quantities in the ERP Software have a major impact on the stock holding capacity of the business. It affects the number of days for which a business holds a stock and the purchase frequency of the business from the supplier. We can understand this from the two scenarios.
High minimum order quantity
When the supplier needs to deal with minimum order quantity then it is obvious that he will have to take care of a much higher quantity, that is the ordered inventory has to be stocked or held in higher amounts. This means the overall cost of holding the inventory or order is also high. The larger order will require a bigger space and even higher working capital to meet the MOQ demand of the supplier. While so much is being invested in one large order, the risk of obsolescence is also higher. However, there is an advantage of placing high MOQ. Here, you save time on reviewing the small quantities that you order frequently. You can review the whole order in one go and there is no more back and forth on that. This saves your administrative cost, time, and effort. Plus, you are less likely to go out of stock.
Low minimum order quantity
In this case, the impact on your inventory is different than the above scenario. If your supplier is ready to accept the minimum MOQ, you hold less inventory and replenish it when required. Less inventory quantity means low cost of holding it, low administrative cost, less space, etc. Here your risk of obsolescence is also very low.
However, there is another side to this. If you order low MOQ, your orders will be more frequent with the supplier, and you will spend more time, recurrently reviewing each order. Which means wastage of time, cost, efforts, order processing cost, and loss of productivity.
In high minimum order quantities, the uncertainty is reduced as the quality is being ordered in large amounts. In low MOQ, you are more exposed to the volatility of the market, and demand-supply issues.
To avoid the disadvantages of both the scenarios, it is better to hold a strategic inventory stock as a safety cushion.
Optimization of MOQ
Above, we have discussed the MOQ as in a rigid form. However, in reality, even when MOQ is low, it is in the range of the given minimum order quantity by the supplier. In the same way, when you deal with high MOQs, you can always negotiate for a mutually favorable MOQ or simply find a suitable supplier. As your quantity is high, there are chances that any suppliers in the market will happily deal with you. To make this dealing more suitable, smooth, and favorable for your business, the concept of Economic Order Quantity is introduced.
This is an economic formula that focuses on the cost areas to come up with the most profitable cost-friendly order quantity. In such a way, you will be able to decrease the cost of operation and can expect higher returns on inventories. This is an effective way of optimizing the supply chain operation.
