What Are Minimum Order Quantities

by Marcin Rotter on 28-02-2018 in Australian Wholesale Sourcing Guides

Wholesaler Guide 103: What Are Minimum Order Quantities (MOQ)?

Wholesale Minimum Order QuantitiesSo, by this point you might have decided upon a great product line and compiled a list of reputable wholesale suppliers. You might have told a supplier that you were ready to place an order and the wholesaler mentioned MOQ. What is MOQ?

 

Of course, as a business owner you don’t want to seem ignorant about industry terminology. That is why we have created this "Wholesaler Guide 103: What Are Minimum Order Quantities (MOQ)?” We will discuss what these are, why they are important to wholesalers and what features they include.

 

Specialized Supply Chain

In order to create the best working relationship with wholesalers, you need to understand a little bit of what they expect from you. We will start with explaining the position of each party in the modern supply chain. The supply chain is the process by which a product is manufactured, transported and sold to the consumer. Each party has a specific function, strength and business model.

Before the Industrial Revolution, products were hand-crafted by tradesmen working in small shops. They might handle the design, manufacturing, storage and sale to the public. The goods might have been hand delivered to the buyer. Everything was under one roof.

After the Industrial Revolution, the product supply chain became much more differentiated. Tools were standardized and companies became more specialized. Today, each step of the supply chain is handled by a different company – manufacturer, wholesaler and retailer.

Specialization has increased the quantity and quality of merchandise, while lowering the overall production cost. In order to understand the core competency of each party, it might be helpful to imagine a key tool, picture or symbol of each party. Here is what we have imagined:

 

  • Manufacturer = Assembly Line

 

  • Wholesaler = Warehouse

 

  • Retailer = Sale

 

The manufacturer is involved in procuring the raw materials, designing the product and assembling it. He creates the overall brand concept.

The ideal core competency for the manufacturer is mass production of goods 24/7/365. But, it has a key problem. Where will it store the large quantities of manufactured goods?

The wholesaler provides the necessary storage for the supply chain. Suppliers might take direct delivery of large quantities of goods directly from the assembly line, using forklifts, trucks, pallets, containers and shelving systems to organize their warehouse. The manufacturer sells his goods to the wholesaler in bulk at a discount.

The ideal core competency of the supplier is handling the logistics of product storage. Eventually, he might have a full warehouse with more stock arriving from the manufacturer, every day. How can he keep the merchandise flowing in and out of his warehouse?

You purchase his goods and sell them directly to the public. You provide him with money and free up some of his warehouse space. Now, he can replenish his shelves with new merchandise.

Your retail core competency is sales and marketing - identifying specific products that will fit consumer needs. If there are any problems, you provide agile customer service to make the consumer happy. You are the final piece of the puzzle from the supply chain (manufacturer and wholesaler) to the demand (your customers). So, let us summarize the strengths and weaknesses of the wholesaler:

 

Strengths

  • Economies of Scale

 

  • Low Prices

 

  • Logistics

 

The distributor is very proficient in logistics. He has a large quantity of goods, which he purchased for a low price, filling up his warehouse.

 

Weaknesses

  • Needs to Move Product

 

  • Sales & Marketing

 

  • Customer Service

 

Gradually, the warehouse will fill up. The supplier needs to keep merchandise flowing in and out. He needs retailers, like you, to help him achieve this goal.

 

Economies of Scale

The Economies of Scale are based on the underlying concept of larger quantities being produced using fewer inputs. Once you pay for your “Fixed Overhead Costs,” your per unit cost for increased production is lower. This allows you to lower your prices and increase your profits.

Large enterprises share many of the same fixed overhead costs of small companies, but can pay them off faster due to the Economies of Scale. Simply put, companies enjoying Economies of Scale will have a different budget, pricing mechanism and focus than smaller companies who lack this advantage.

 

Fixed Warehouse Overhead

The wholesaler has based his pricing mechanism upon bulk purchases to give it the advantages of the Economies of Scale. What are some of the fixed overhead costs of a warehouse?

These might include petrol for the forklifts, electricity for the lights, rent for the property and the employees. Supplier customer service representatives are involved in purchasing merchandise, answering questions, handling problems, processing paperwork and creating new accounts.

 

“You won’t be able to understand a man until you walk a mile in his shoes.”

 

Warehouse workers might be variable or fixed – some variable workers might be temps who are only hired during the holiday hours. Otherwise, the regular maintenance and forklift operators are also part of the warehouse fixed overhead costs.

Once you place an order, it sets in motion a team of administrative and warehouse staff who must create your account, check inventory, locate the goods and use forklifts to move them to the trucks for shipment to you. All of that processing takes time, energy and money as part of the wholesaler’s overhead. Is your order large enough to pay the wages of all of these warehouse workers?

 

Volume, Volume & Volume

The wholesaler does not really have much control over the design, pricing or marketing of merchandise. The prices are primarily determined by the manufacturer or retailer. Therefore, the distributor is looking for a core competency that it can control: volume.

 

“Don’t taxis have minimum fares?”

 

Wholesalers might have warehouses stocked with products for an entire industry, which includes brands from different manufacturers. Their entire business model is predicated upon the Economies of Scale: Volume. They are masters of volume - the more merchandise they move, the higher their profits.

 

Minimum Order Quantities

The Minimum Order Quantity (MOQ) allows for wholesalers to take advantage of their volume advantage. You might also hear this referred to as Minimum Order Requirements - the two terms are used interchangeably.

The requirements are the things that you need to satisfy before the wholesaler will sell you his wares. The quantities are usually the primary issues for online stores. They can satisfy most of the other requirements, easily enough.

“You can’t buy one grain of rice, can you?”

In order to justify doing business with you, a wholesaler might require you to place an initial minimum order above a certain quantity or dollar amount. For example, you must make an initial order of more than $1,000 with a wholesaler.

 

What does MOQ accomplish?

MOQ has multiple purposes. First, it pays for overhead. Second, it rewards suppliers for providing valuable pricing information. Third, it cuts out “window shoppers.”

 

Do all wholesalers have requirements?

Yes.

 

Do all suppliers have minimum order quantities?

No.

 

What should I do if my store is small and I don't need to purchase large quantities?

Just like an apartment, you might be able to put down a deposit for the minimum dollar amount. Then, over time, you can use this account deposit to purchase your smaller quantities.

What is a Minimum Re-Order?

Some wholesalers will basically require you to satisfy requirements for at least two purchases – the initial and at least one re-order.

Highly competitive industries tend to have higher MOQ terms. Some business owners might prefer a less competitive industry without stringent MOQ conditions.

 

Pricing Tiers

Another possibility is that your supplier will offer pricing tiers. This is a nice option that provides you with scalability. You have an incentive to grow your business, which will lead to lower prices and a higher profit margin.

By setting these volume parameters, warehouses can more easily estimate and control product flow. If 1,000 units flow out every month, then the warehouse will have space for 1,000 more units on the warehouse shelves. If you purchase at a higher pricing tier of 3,000 units per month, then the wholesaler can purchase more from the manufacturer. Everyone wins.

 

Signing a Mutually Beneficial Contract

Once you have the financial wherewithal to satisfy the MOQ, you need to carefully consider all of the other aspects of the wholesaler relationship. These might include processing times, delivery schedule, payment types and return policies.

You will need to determine what is negotiable and what is non-negotiable in the wholesaler contract. Usually, when the MOQ is written down it is non-negotiable. This is the baseline overhead for the supplier.

The largest wholesalers are likely to have more stringent terms and conditions because they have more leverage. They should be able to find more retailers willing to make frequent, sizable orders that are worth their time.

Some wholesalers will not allow you to sell their goods online. Read the fine print of the wholesaler contract.

 

Successful Product Supply

Sourcing wholesale products at low prices gives you room to make ample profits. The wholesaler MOQ might be a key basis for your budget. You might need to adjust your capital expenditures to satisfy these requirements. Hopefully, your wholesaler offers price tiers to give you an incentive to increase your order size.

Wholesaler contract negotiations usually only allow for minor adjustments. Carefully, read the terms and conditions; if you are unsure, then you should contact a lawyer. Once you know what wholesaler suppliers expect from you, you will have a better chance of creating a long-term mutually beneficial relationship.

 

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