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What determines the MOQ?

• The MOQ is based on storage costs, shipping fees, taxes and even insurance for the supplier

• The MOQ or EOQ is calculated using pretty basic math, although the textbook EOQ equation isn't much more than a basic starting point for determining a supplier's actual minimum order standards.

For reference purposes, though, here it is:

o √2*A*Cp/Ch

ï‚§ A= Annual Demand

ï‚§ Cp = Cost to Place Single Order

ï‚§ Ch = Cost to Hold One Unit of Inventory Annually

A good example of this formula in play:

Buyer A runs an online business for auto parts. Annual demand for rear main seals is 16,000. The annual holding cost per unit is $2.50 and the cost to place an order is $50.

In order to calculate the MOQ/EOQ, Buyer A executes the following formula:

√2*16,000*$50/$2.50 = 800 units per order

In order for this equation to be valid, Buyer A is assuming that:

1. The cost of every order is constant

2. The demand for this product is constant

3. The lead time for this product is fixed

4. The price that Buyer A pays for each unit is constant

5. Stock replenishment is instant and the entire batch is shipped all at once

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