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Why Your Annual Order Rate Means Nothing

February 21, 2016


Folks,

When our customers send us a RFQ, we’ve always asked that they share their technical requirements including the BOM, 2D drawings, and 3D flies, inspection standards, Product Requirements Document (PRD), required international certifications and their specification.

We also request the product or program commercial information. How many units will you order over the course of the year, size and frequency of the shipments, the Incoterm (ex works, FOB, CIF, DDP, etc.) and your target price.

This has all been quite typical and an accepted path in the product sourcing & supply chain management business. We may know and have done business with the world’s best linear motion control device manufacturer, but if our customer’s commercial and technical requirements don’t mirror those of the factory, it’s not a good fit for either party.

All logical, with the exception of one very important factor. Many suppliers no longer place any value in the EAU (Estimated Annual Usage) or customer forecast. Instead, the key variable is now your MOU (Minimum Order Quantity).

While forecasts and purchase orders had long been considered the end-all in guiding the negotiation process, many factories, especially those in Asia discount the value, if not totally disregard customer forecasts. They focus solely on the immediate and that takes the form of your PO.

Why is this? Well, it goes without saying that economic times remain uncertain. While forecasts used to assist with the level loading of factories and planning for capacity utilization, nowadays forecasts rarely predict the actual consumption rate. Factories know this and place their trust, and calculate their price on the PO and only the PO.

This trend is magnified by the factories desire to hold “zero inventory”. When I tour suppliers in Asia and elsewhere, I rarely see any appreciable number of components, consumables or raw materials in stock. When we request price breaks based upon an annual forecast, say 10K, 20K and 35K units and releases against those numbers, we get a quotation that shows price breaks based on 1K, 2K and 3K POs and the related MOQs.

What this means is everyone that makes up the supply chain quotes on spot purchase quantities and then get slammed with rush orders. A tough way to do business, but it’s the new reality.

The 2016 version of the old axiom “Money Talks and B.S. Walks”.

Cheers,

Jack Daniels
+1.617.285.2486

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