Fix the comparison boundary before calculating
Records and assumptions to align
- Define one SKU/case pack, order channel, customer segment and review period. (not complete)
- Separate per-order setup/pick/administration cost from per-unit product and fulfilment cost. (not complete)
- Identify production, carton, pallet or carrier constraints and any genuine step cost. (not complete)
- For the buyer view, state unit cash cost, storage, expected sell-through horizon and recovery boundary. (not complete)
- Use completed order and abandonment/requote evidence before claiming buyer friction. (not complete)
| Field | Required unit | Preferred evidence |
|---|---|---|
| Q | units/order | user-entered scenario constrained by case/production rules |
| unit price - unit variable cost | CU/unit | current price and cost record |
| per-order cost | CU/order | time/operations record |
| landed unit cash cost | CU/unit | current quote, freight and receiving record |
Build a reproducible scenario
supplier order contribution(Q) = Q × (unit price - unit variable cost) - per-order cost - quantity step costs; buyer gross cash exposure(Q) = Q × landed unit cash cost
- Q
- Candidate minimum order quantity (units/order) — user-entered scenario constrained by case/production rules
- unit price - unit variable cost
- Retained contribution before order-level and step costs (CU/unit) — current price and cost record
- per-order cost
- Setup, administration, pick and other cost incurred once per order (CU/order) — time/operations record
- landed unit cash cost
- Buyer cash committed per received unit under the declared boundary (CU/unit) — current quote, freight and receiving record
Do not count per-order cost again per unit. Buyer cash exposure is not final economic loss; sell-through, recovery and timing are separate.
Fictional 20-, 50- and 100-unit order cases
Unit price is 12 CU, unit variable cost is 7 CU and per-order cost is 120 CU.
| Case | Declared inputs | Substitution | Result |
|---|---|---|---|
| 20 units | 20 × 5 CU unit contribution; 120 CU per-order cost | 20 × (12 - 7) - 120 | -20 CU |
| 50 units | 50 × 5 CU unit contribution; 120 CU per-order cost | 50 × 5 - 120 | 130 CU |
| 100 units with step cost | 100 × 5 CU; 120 CU per-order; 180 CU capacity step | 100 × 5 - 120 - 180 | 200 CU |
| Buyer cash at 50 | 50 units; 12 CU landed cash cost | 50 × 12 | 600 CU gross cash exposure |
Stress-test the uncertain inputs
| Variable | Lower case | Higher case | What it tests |
|---|---|---|---|
| Per-order handling cost | More efficient process | Manual/complex order | Tests the seller’s minimum viable quantity |
| Capacity step | Fits existing batch/carton | Triggers labour/equipment/freight step | Tests non-linear cost |
| Buyer sell-through horizon | Faster observed movement | Slower sensitivity | Tests cash/storage friction without forecasting |
Stop and review when
- Case-pack or capacity constraints are represented as smooth per-unit costs. (not complete)
- Buyer sell-through is asserted without evidence or a labelled scenario. (not complete)
- Seller contribution and buyer cash exposure are collapsed into one metric. (not complete)
Compare primary-only and dual-source scenarios on the same boundary
Reconcile the two sourcing cases before comparing them
- Use current quotes and purchase-order records for the same item specification, quantity period, currency and indirect-tax basis. (not complete)
- Keep each supplier’s landed unit cost, minimum quantity and fixed/order cost separate. (not complete)
- Record usable capacity, promised lead time and payment timing as evidence fields rather than supplier-quality scores. (not complete)
- Name duplicated qualification, administration, freight or setup costs instead of hiding them in a blended unit rate. (not complete)
- Stop if either case depends on an assumed supplier failure probability, an industry allocation benchmark or unverified contract terms. (not complete)
| Comparison field | Primary-only case | Dual-source case | Evidence or stop check |
|---|---|---|---|
| Landed unit cost | Primary quote on the declared basis | Primary and secondary quotes kept separate before any weighted view | Current matched quotes; stop if specifications differ |
| Minimum quantities | Primary minimum and case-pack rule | Each supplier minimum and combined committed quantity | Purchase terms; stop if minimums create unusable stock |
| Fixed/order costs | One set of setup, order and receiving costs | Duplicated setup, order, freight and receiving costs where applicable | Order and operations records; do not smooth a step cost |
| Usable capacity | Capacity available under the primary case | Capacity available from each source on the same period | Confirmed capacity, not a forecast |
| Lead-time exposure | Promised lead time and current open-order position | Promised lead time and open-order position for each source | Dated records; no failure probability |
| Cash timing | Primary deposits, payment dates and receipt timing | Payment and receipt timing by source | Matched cash events; stop if periods are misaligned |
Turn the scenario into a controlled decision
- Reconcile the baseline to current records and name the evidence owner.
- Run the base case, then change one uncertain input at a time.
- Record the chosen response, approval limit, review date and stop trigger.
- Compare actual results with the original boundary before reusing the assumption.
Avoid these mistakes
- Dividing a setup cost by an assumed future volume rather than the current order. (not complete)
- Calling buyer cash committed the expected loss. (not complete)
- Selecting the quantity with the greatest total contribution without checking conversion and capacity. (not complete)
Questions to resolve before approval
- Is the break-even quantity the right MOQ?
- Not automatically. It is one boundary; commercial contribution, capacity steps, buyer friction and service strategy also matter.
- Should a lower MOQ always improve sales?
- No. Treat any conversion or order-frequency effect as observed evidence or a sensitivity, not an automatic result.
Methodology and source boundary
- Minimum Order Value methodology — Margin101: Product-owned minimum order value and order-contribution boundary.
- Minimum Batch Size methodology — Margin101: Product-owned batch setup and capacity-step boundary.
- Inventory Funding Gap methodology — Margin101: Product-owned buyer-side inventory cash timing boundary.