When manufacturers need to establish their base line price, they must be able to properly identify their manufacturing Minimum Order Quantity (MOQ) volume and use that volume as their foundation for quotations and contractual supply agreements. Establishing MOQ in sales proposals for manufacturers isn’t difficult. In fact, it’s the best way to determine the most cost-effective manufacturing quantity.
Coming up With Your Own Minimum Order Quantity
The minimum order quantity is that quantity by which any increase won't lower your manufacturing costs. We’ll show how manufacturers can establish their MOQ and how it can be used when quoting customers and proposing long-term supply agreements.
The minimum quantity is the “base-line” volume or minimum volume that must be ordered by customers. It also happens to be the point at which manufacturers maximized their costs relative to price. For example, we’re all familiar with how volume leads to lower pricing. Buy more and get a better price. Fairly straightforward isn’t it?
Well, it is and it isn’t. For one thing, while you will get a better price for higher volume, it simply doesn’t mean you’ll continue to get lower pricing regardless of how high that volume is. At some point, regardless of how much you buy, there will be a baseline price. It’s this baseline price that comes from the manufacturer’s MOQ.
An Example of How MOQ is Determined
Every manufacturer has several work operations or production cells on the production floor. At each of these production cells, there is a set up time for the operation and a cycle time to complete the work task. Set up time refers to the time it takes the operator or employee to set up the machine, equipment or jigs. Cycle time refers to the time needed to complete the actual work itself. So, there is a set up time for the equipment and machinery and a cycle time needed to do the actual work operation.
- MOQ has a Set Up Time
- MOQ has a Cycle Time
In this example, a company has 5 operations it performs in manufacturing. These are summarized below:
In the following table, the operations are on the left hand side. The first two columns are titled “Set Up Times” and “Cycle Times”. The salary of the production employees is found in the “Cost/Hour” section.
- There is only 1 set up time per work operation
- The cycle times are for 1 unit or 1 finished work task
For a complete breakdown of this pricing/costing sheet, and to get a copy of the excel sheet yourself, read my post “Are You Capturing Production Set Up Times in Your Prices?"
The minimum quantity is established when the cycle times are maximized for 1 unit of measure. This means that the production employee can’t possibly improve cycle times no matter how many more units are manufactured. Most companies understand this aspect of their production, but very few take the time to capture their set up times as part of their minimum order quantity. The above table is only one portion of the total cost structure for a manufacturer.
How Does the MOQ Fit into a Contractual Supply Agreement?
The MOQ could be used on its own as the minimum volume quoted to customers, or can be incorporated as the minimum quantity taken within releases in a contractual supply agreement. In my post “Supply Chain Management: Running a Better Supply Agreement” , I use the approach of using both Finished Product ready to ship upon customer requests, and Semi-Finished Product in process waiting to replenish the Finished Product releases. The minimum quantity could the volume for both the Finished & Semi-Finished Product as part of the agreement.
When determining your company’s MOQ, be sure to capture your set up times and maximize your cycle times. Finding the best possible cycle time – regardless of any additional volume, will help point the way to determining your minimum order quantity in manufacturing. Establishing that minimum amount in sales proposals will help ensure your company is establishing your base line pricing and maximizing your manufacturing resources.
The above video outlines some simple strategies you can employ when designing and layout out lean work cells. The video provides several sample work cell designs and provides insight into how to determine the manufacturing productivity rate emerging from the cell. You can read more by going to: Manufacturing Work Cell Optimization: Design, Layout and Analysis