Logistics minimum – what is it and how does it work?
The simplest explanation of the logistics minimum is the lowest value that an order must reach in order for a supplier to decide to fulfill it. Sometimes, however, the term is also used to refer to the need to exceed the value of an order in order to achieve preferential terms.
The value of the order is not always decisive – sometimes the number of pieces of a product ordered or other units (such as cubic meters) are accepted to determine the achievement of the logistics minimum. This is especially important when it is necessary to arrange special transportation – for example, for construction materials or dangerous goods.
In situations where the supplier of goods is also the provider of the service (for example, in the context of construction materials), the logistics minimum can be determined in square meters.
Example:
Mr. Henry runs a company engaged in the repair and installation of facades on buildings. However, he specializes in buildings with large areas. The entrepreneur has therefore set a logistical minimum of 1,000m2 of facades. This means that the company does not accept orders in which the customer orders work on a smaller area to be completed.
An entrepreneur can present several thresholds for the logistics minimum. The lowest one indicates what orders will be fulfilled at all, the next ones will “unlock” preferences (discounts, additional services, etc.).
Example:
Mr. Henry’s company carries out orders from 1,000m2 of facade, but customers with larger needs can take advantage of discounts. The company’s offer, which is aimed at developers and estate managers, among others, includes discounts for orders for the construction or renovation of facades of more than 10,000m2. This keeps the company busy for a longer period, which has a positive impact on the company’s financial stability.
Minimum order quantity, or minimum order size
The abbreviation MOQ is taken from Minimum Order Quantity, which means minimum quantity or order size. It’s an almost twin term to logistical minimum, but it doesn’t refer to the delivery or performance of a service, but to the manufacturer’s fulfillment of an order.
Important!
Minimum order size is not the same as minimum production lot size. The latter depends on many factors and is rather a technical parameter, related to the capacity of production lines and various economic criteria.
MOQs are usually expressed in basic units for a given product. So, if a product is made by the piece (car parts, electronics, etc.), it is the piece that will be the accepted unit. If we are talking about textiles, the most commonly chosen unit will be the running meter, and the minimum order quantity concerning – for example – road salt – will be expressed in kilograms or tons.
The minimum order size serves not only to determine whether the manufacturer decides to produce the goods at all, but also allows to set a base price for the product.
The importance of MOQs for retailers and distributors
The answer can be simple and complex at the same time. In the simpler variant, it is enough to say that it is – of course – about money. However, wishing to discuss the topic more broadly, it is worth mentioning that MOQ is nothing more than a tool to help optimize the costs of a company.
MOQ vs. delivery and merchandise management
Correctly setting the minimum order size makes the supplier:
- It uses warehouse space more efficiently and manages inventory,
- plans the process of distributing goods in a thoughtful way,
- Fulfills orders for customers more efficiently,
- lowers the cost of transporting goods,
- avoids fulfilling small orders that are unprofitable or not very profitable.
Important!
MOQs are important for those companies that have high production costs and significant storage space requirements. Especially companies that spend a lot of money on storing and transporting goods can benefit from a thoughtful MOQ.
This applies to manufacturers and distributors of dangerous or bulky goods, among others – in both cases (but also in many others) storage and transportation costs can sometimes be very high, and optimizing them can prove crucial to achieving better financial results.
By establishing (and constantly optimizing the MOQ, depending on conditions), the supplier or manufacturer gains, first of all, stability – the MOQ has a positive effect on liquidity, allows to keep demand in check, and thus build a more confident production strategy.
MOQ optimization in e-commerce. Is a low MOQ a good solution?
It’s easy to talk about the effects of setting the MOQ correctly, but… what is it actually? What aspects should be paid attention to when determining the minimum order size?
- First: setting MOQs too high can lead to a surplus of goods that, instead of helping to optimize storage, will sit on shelves and generate costs.
- Second: when setting the minimum value (size) of the order, be sure to take into account the results of sales and change the terms of the MOQ on an ongoing basis – according to current demand.
- Third: consider seasonality if the products you sell are susceptible to it.
- Fourth: when setting MOQs, offer buyers not only the first threshold to fulfill the order, but also the second (or subsequent) ones, entitling them to attractive discounts. By doing so, you will induce some customers to buy more.
MOQ in practice, or what can a buyer do?
If it is your company that is the buying party (because, for example, you run an online store and source goods directly from the manufacturer or from one of your suppliers) in theory you don’t have much room for maneuver. However, this does not mean that the option to negotiate is completely unavailable. If the MOQ proposed by your chosen supplier is too high, you have several options.
- Try negotiating – ask about discounts for larger purchases or the possibility of combining your order with other products. Finally – if the products you order are going to be sourced more frequently – tell the seller about it. The vision of fulfilling smaller but regular orders may be enough to make an exception for your company and bend the rules a bit.
- Look for other suppliers – this is universal advice that will not only help your company find a better deal. With a better understanding of the realities, you will gain knowledge that will enable you to negotiate more efficiently. With an idea of the MOQs offered by different suppliers, you will gain a starting point from which you will be able to begin subsequent discussions.
- Ask suppliers about discounts and special offers – be sure to write down and analyze the answers you get. This way, when you make future orders, you will know which wholesalers to contact when you have larger orders, and which ones offer better terms for smaller batches.
What to base MOQ negotiations on?
Negotiating the minimum order size is a good idea to start… before you even make contact with the supplier. In other words: prepare for them well. The most important thing in all this is to know perfectly well the needs of your company. You are, after all, able to determine, at least indicatively, how often you will order a given commodity or what quantities you will need. These needs, of course, may change over time, but it is very important that you – entering negotiations – have concrete numbers.
By having a purchasing plan for the next weeks or months, you will show the supplier your preparedness, willingness for long-term cooperation and serious approach to corporate purchasing. This will make it easier for you to convince him to present a better offer – for the supplier, a better buyer who may buy a smaller batch of goods, but more often (and preferably on a regular basis) than a one-off, large sale (although, of course, much depends on the size of the deal).
Offer the supplier a gradual adjustment of sales terms (including MOQs). Perhaps you can negotiate better terms as more orders come in?
Also outline, if only vaguely, your plans for the development of your store in terms related to purchases from the supplier. Knowing that you have ambitions to expand your assortment and significantly increase sales, the wholesaler is more likely to offer your business preferential cooperation.
There is MOQ, there is risk
Unfortunately, there is no way to completely eliminate the risk. Suppliers will not always agree to your terms, and even the “special” terms offered may not be enough. Once you’ve exhausted all negotiating options, it remains to either abandon the deal or take the risk.
Above all, you are risking money, because buying more than previously planned involves specific expenses.
- First: you will spend more on the goods themselves.
- Second: transportation costs may be higher.
- Third: you will also pay more for storage.
However, that’s not all. More merchandise means an increasing risk of a surplus, and – in the case of poor sales – of goods lingering on store (or warehouse) shelves. Depending on the type of product, such a situation may force you to sell at low or near-zero margins, or even to dispose of ordered products (if they may spoil). This, in turn, generates further costs, in return for no earnings.
This risk also applies to new product launches. Without knowing what will work, and being forced to buy a large batch, you risk complete failure.
Example:
Mr. Gregory runs an online hobby store that sells 3D printing accessories and materials. Encouraged by the good price, he purchased filament for his store from a new manufacturer. Unfortunately – the MOQ for this product was quite high, forcing Mr. Gregory to purchase 250 packs of the product.
A few days after the launch of sales, complaints began pouring into Mr. Gregory’s store from customers dissatisfied with the quality of the product. Mr. Gregory will now have to go through a long and cumbersome complaint process with the manufacturer – but before that, he will have to fulfill the customers’ complaints and store somewhere the defective goods, which he did not have a chance to check beforehand. All this will generate considerable costs, and on top of that will not bring any profit to the company.
The fact that you already know what you’re risking doesn’t make the risk any less in any way, but it should help you prepare to buy from suppliers.
Remember, too, that not all suppliers use MOQs – it depends largely on the type of goods they sell and the target group they target. However, the fact that a wholesaler does not impose a limitation in the form of a minimum order size is not necessarily positive news – the lack of MOQs can mean higher prices for buyers (although you can try negotiations here as well).
Summary
Minimum order quantity is a logistical practice that manufacturers and suppliers like to use – and they have many reasons for doing so. When running an online store, you have to expect that suppliers will use MOQs, thus limiting your room for negotiation.
Remember, however, that with the right approach, a plan for cooperation and ambitions for growth, you can negotiate terms that will meet the needs of both your company and the supplier – who, after all, cares about winning a regular customer.
