The Value of determine a minimum order quantity practices in Supply Chain Management

Subjects : AMN430 International Logistic Management
Tutor: Michael Cox
Student name: Yao Kaiwen
Student number: n8953287 1.0 Introduction
The world today is developing into a big global market which forcing companies all over the world should take nearly everything into consideration at the same time when they are doing business activities.(Zhao,Yao;Katehakis,Michael N.2006)In order to respond to the rapidly changing markets and remain competitive with other companies, they need to increase their own flexibility. There is a multi-criterion problem for supplier to choose which is that they should keep a balance between the production quantities and running cost. (Shankar. 2009.) Usually, some suppliers set the Minimum Order Quantity (MOQ) to solve this problem.

2.0 The overviews of MOQ
Many industries like pharmaceutical, apparel and packaged company use Minimum Order Quantity (MOQ) in today’s world. When facing with these companies, customers, distributors or retailers only have two choices; either they can choose to order at least a minimum quantity, or not to order from these industries or companies. Suppliers want to minimize the cost of interactions with buyers in order to achieve economies of scale in production and transportation. (Rebecca.2001)

MOQ sometimes also used by manufacturer. When we browse the e-commerce sourcing websites such as the alibaba.com, it is easy to find that they state their MOQ requirement along with the introduction of products. By doing in this way, it helps manufacturers to “reduce the uncertainty during the ordering process” and “ensure markets”. However, some customers and retailers may not like the manufacturers do in this way, apparently, MOQ restricts their ordering flexibility.

A simple example of MOQ in real company is that the sport manufacturer and distributor, Ski-wear, Sport Obermeyer (Fisher,M&Raman,A.1996).Sport Obermeyer practice their all manufacturing activities in two locations : China and Hong Kong, in order to reduce production related costs. In Hong Kong, They set a MOQ of 600 garments per order while in China it requires 1200 garments per order. The MOQ restricts would be applied to a particular kind of product, such as all colors of a particular style.

3.0 Criteria to be applied in order to determine a minimum order quantity
Low quantities sure impact the cost of freight per piece. All buyers face this issue. There is a trade-off: either optimize freight costs and risk keeping unsold inventory, or buy only what you know you will sell and pay a little more. So there are two vital criteria below have strongly impacts on minimum order quantity.
Transportation cost. Transportation consists of carrier capabilities, capacity, and cost of transportation services. (M Grazia.2005)The cost of transportation cost could be relatively high due to some problems. Some customers’ or retails’ small demands or requirement would contribute to it. By that I mean, the suppliers have a high transportation cost to deliver a small quantities of merchandise to customers which contributes to a low profits. Transportation decisions that do not account for changes in inventory will often result in overall cost increases while delivering apparent savings.
Inventory carrying cost. The cost of carrying inventory is used to help companies determine how much profit can be made on currently. (Maxwell, James R.2008) The cost is, in a certain time, how much a supplier should pay for holding and storing its inventory. The carrying cost of inventory is often described as a percentage of the inventory value which may include taxes, insurance, and the cost of insuring and replacing items. The problem is that some small orders in reality world may need supplier to pay higher transportation costs in exchange for lower inventory carrying costs. In another way, if suppliers tried to give up the small