GlossaryKind of term: Cost and economicsMinimum order value
What is a minimum order value?
Minimum order value is the lowest order amount you accept or invoice, because every order carries fixed costs apart from making the part.
It sits in your terms of sale as a floor, applied in one of three common ways: below this amount you decline the order, invoice the minimum or add a fixed charge. It covers costs that arise per order and are not in the part's estimate lines: handling the request, estimating, entering the order, buying material, work preparation, packing, shipping and invoicing.
How does a minimum order value work in practice?
On a small part, for example a spacer in free-cutting steel with a short cycle time, that order work can cost more than making the part. Setup and programming are in the estimate; the hours of inside sales, purchasing and administration often are not, because they sit in the overhead mark-up. As a percentage of a small order that mark-up brings in little, so a small order can lose money while the unit price is right. A minimum order value or a fixed order charge covers this; the right level follows from your own order costs.
What is a minimum order value often confused with?
A minimum order value is not a minimum quantity: one order clears it with one large part, another falls short with twenty small ones. Nor is it the one-off cost per batch: setup and programming belong to the part, order costs to the order as a whole.
Frequently asked questions
Why do machine shops have a minimum order value?
Because every order needs fixed work besides the machining itself: estimating, entering the order, buying material, packing and invoicing. On a small order that work can cost more than the part; the minimum order value covers it.
Is a fixed order charge better than a minimum order value?
They are different choices. A fixed charge on every order is transparent and applies to large orders too; a minimum order value only affects orders below the floor. Which fits depends on your order mix and what your customers accept.