Module: Minimum Order Quantity for a supplier

Executive summary

When creating orders, we often encounter supplier limits. One of these limits may be the Minimum Order Quantity or order value, by which the supplier wants to avoid frequent and inefficient orders in small quantities or value. As an incentive to take the minimum quantity, suppliers often choose certain benefits for customers who then try to reach the set limits. For example, such benefit may be: free shipping or reduced price, quantity discount or promotional products in addition to the order. Conversely, if given limit is not met in an order, the order may be penalized according to the contract or may not be executed at all.

The MOQ module allows you to set limits for groups of items falling within an intersection of selected product and warehouse groups. For each day, orders are suggested to meet at least the specified quantity or value for the supplier. The module achieves this by moving suitable orders from following days to the current day.

Functional description

We can consider two levels of setting the minimum order quantity. The first case is the setting of MOQ* at the level of a specific product of the supplier (this case is described in chapter of the Order Design Module - acceptance of the minimum set and quantity). The second case is the MOQ of the supplier, which expresses the limit on all or a certain part of his products in one or more warehouses. If the MOQ is met for the current order, there is no problem and there is no need to modify this order. However, there may be situations where the current order does not fulfill the MOQ and it is necessary to fulfill the order using future orders according to the selected parameters so that the current order meets these limits.

* MOQ = minimum order quantity

The procedure of the method is illustrated in the following example.

Assignment:

Supplier X provides a discount to the company when ordering goods worth more than CZK 200,000. The company’s goal is to adjust orders so that this discount is achieved. The company also wants to take into account expiration of goods.

Assumption:

For the selected products, to simplify the example, it is calculated that taking expiration into account, the suggested orders may not be moved to the current date within more than 35 days period, ie more than 5 weeks (there would be a threat that the goods in stock will spoil).

Procedure for achieving the assigned goal:

  1. A combination of supplier (supplier X), product group, and warehouses to be included in the calculation is defined. This combination can be defined by the user in the administration (see Minimum order limit administration below) or can be transmitted using STOCK Input Database Interface.

  2. An imaginary matrix (Figure 1) is created for the following algorithm, with columns:

    • product ID,
    • score (according to ABC segmentation),
    • the following columns containing the outlook for the future.

  3. The future outlook from the previous step is adjusted based on the maximum merge period. Maximum Merge Period represents the maximum number of days to move orders for today for a particular product. If the outlook meets this criterion, then it enters the calculation. If the outlook does not meet this criterion, it will not be taken into account (see the following description - Meaning of the maximum merger period). In this example, the maximum merge period is five weeks (see Assumption)

    Significance of maximum merger period:

    The maximum merging period generally expresses a certain level of aspiration in days, for which we can look to the future for a given item and for which it is still relevant to move orders from the future to the current moment.

    Possible examples of parameters for determining the maximum merge period are:

  • Maximum Inventory Turnover I want to cover - if I want to achieve a turnover of 80 days, I will not stock the product with a turnover of 120 days.
  • Expiration - it is not possible to order a product that has an expiration of 60 days, if it would be ordered by default, for example in 65 days.
  1. After this data adjustment, the model continues to work with product scores and period. The period can be entered by the user in the administration (see Administration of the minimum order limit below) or can be transmitted using STOCK Input Database Interface. Figure 1 shows two possible options for setting the period, which indicates the length of the future outlook. Calculation of this module therefore includes the score of individual products and the user-selected period. The period and score settings then balance whether items with a higher score or even items with a lower score are used to fill the limit. The longer the period, the more likely we take A-score products with more day coverage to cover MOQ.

Steps 4:

  • Sorting products by their score (exact values - not limited to ABC).
  • In the set period, product order siggestions are searched in the order of the score (line by line) until the MOQ is filled.
  • A suggested order is created that meets the supplier’s MOQ

Picture for illustrative example:

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Figure 1 illustrates selection of items that meet the selected minimum order quantity (worth CZK 200,000). The figure shows two possible period options. With a shorter period, products with ID 1 - 7 are selected to fulfill the minimum order quantity, ie products with ABC value A and B, on the contrary, with a longer period, only products 1 and 2 with ABC segment A are selected. The outlook is limited to a maximum inventory holding period of 5 weeks. Orders in Week 6 cannot be used to move to the current design (grayed out).

Administration of minimum order limit

Ordering limits can be administered directly in the STOCK or can be sent from the primary system using STOCK Input Database Interface.

The settings of limits for ordering in STOCK are shown in the following Figure 2. In the settings, the user can select Warehouse(s), Product Groups and Suppliers for which the settings are valid. It is possible to subsequently set a financial or quantity limit for the selected set of supplier’s products, at the same time it is possible to enter a period for merging orders and also time for merging orders.

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Picture 2

After saving, a table (Figure 3) will be displayed with an overview of all settings and the options to delete or edit them.

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Picture 3