What is the POQ model?

POQ, or Production Order Quantity Model, is an inventory management method that helps businesses determine the optimal quantity of products to produce in each cycle. The goal of the POQ model is to minimize costs such as inventory holding costs and ordering costs, thereby improving production efficiency.

Why use the POQ model?

The POQ model is especially useful for manufacturing and direct-to-consumer (D2C) businesses. With this model, businesses can easily determine the optimal order quantity by analyzing cost factors, including inventory holding costs and ordering costs. As a result, businesses avoid overstocking or costs exceeding their budget.

POQ Model Calculation Formula

POQ (Production Order Quantity) model helps businesses determine the optimal number of products to produce in a cycle to minimize costs and meet market demand. The specific POQ calculation formula is as follows:
POQ = √ { ( 2 x D x S ) ÷ [ H x ( 1 – d / p ) ] }

Where:

D = Demand for goods in a year

S = Ordering cost per production

H = Inventory cost per product

d = Average demand for goods in a day

p = Quantity produced per day

Example:
Suppose a business sells t-shirts directly to customers. The parameters for T-shirt production are:

- Production time per year: 300 days

- Demand for T-shirts per year (D): 30,000 products

- Factory capacity per day (p): 1000 products

- Average demand per day (d): 200 products

- Ordering cost (S): 40,000,000 VND

- Storage cost (H): 20,000 VND/product

Apply the formula:

POQ = √ {(2 x 30,000 x 40,000,000) ÷ [20,000 x (1 – 200/1,000)]} = 15,000 (products)

Thus, the optimal number of products to be produced in a cycle is 15,000 products. Applying the POQ model helps businesses set up a reasonable production scale, minimize waste and save costs.

Basic POQ Model Types
In manufacturing, D2C (Direct to Consumer) businesses often use three basic POQ models to optimize processes and meet market demand. These strategies include: make-to-stock (MTS), make-to-order (MTO), and make-to-assemble (MTA).

Made to Stock (MTS)

MTS is a manufacturing strategy based on customer demand forecasts. Accordingly, finished products will be produced and stored in warehouses or distribution centers, ready to wait for orders from customers. For the MTS model to operate effectively, businesses must rely on real-time data and accurate demand forecasts to ensure enough products to meet the market without creating excess inventory.

MTS is especially suitable for fast-moving or low-value consumer products, such as toothpaste, soap, or bottled drinks. However, this model also has certain limitations. Storing large inventories can increase operating costs, warehousing costs, and lead to waste risks when products become obsolete or damaged. Therefore, businesses need to strictly control inventory levels to optimize costs and avoid wasting resources.

Made to Order (MTO)

Made to Order (MTO) is a production method based on actual demand from customers. In this model, products are only produced when there is a specific order, allowing customers to purchase customized products according to their individual requirements. For example, Nike brand applies the MTO model by allowing customers to design custom shoes on the website, then produce each pair of shoes according to each order.

MTO helps businesses be flexible in production and minimize inventory, thereby reducing the risk of products becoming outdated or difficult to sell. Producing only when there is actual demand also helps limit waste and optimize inventory costs. However, MTO often requires longer lead times, as products are manufactured after receiving orders, especially for complex products such as custom cars.

To reduce lead times, businesses need to do material requirements planning (MRP) to ensure products can be assembled quickly. Proper planning and inventory of raw materials helps businesses meet orders on time and increase customer satisfaction.

Made to Assembly (MTA)

Made to Assembly (MTA) is a production method in which product components are prepared in advance, but only fully assembled when an order is received from a customer. Unlike the MTS (Made to Stock) model, products in MTA are not completed and stored in advance but wait until the actual order is received.

MTA combines the flexibility of MTO and the quick response of MTS. Since parts are already in stock, MTA minimizes the risk of supply chain disruptions and ensures faster delivery times than MTO. Additionally, since production is based on actual orders, MTA avoids the excess inventory that is common in the MTS model.

The MTA model saves on inventory costs by only needing to store minimal raw materials and parts, thereby reducing warehousing costs. MTA is often applied to products that require customization, such as personal computers, because it can fulfill orders quickly while maintaining flexibility in production.

Distinguishing between the EOQ and POQ models

In manufacturing, the POQ (Production Order Quantity) and EOQ (Economic Order Quantity) models are two popular inventory management methods but have different operating principles.

The POQ model takes into account continuous production and allows inventory to build up over time. In POQ, the production schedule is set to meet the expected demand, and inventory accumulates gradually during the production process. This helps businesses produce stably, minimize the risk of shortages, and flexibly respond to market fluctuations without having to order in large batches.

In contrast, the EOQ model is based on ordering fixed quantities in each batch to meet specific demand. EOQ optimizes inventory costs and ordering costs, and is often suitable for businesses with stable, less volatile product demand.

Key Differences Between POQ and EOQ

• Inventory Accumulation: POQ allows inventory to build up gradually during production, while EOQ only orders when inventory levels are low.
• Production Scheduling: POQ requires continuous production planning to meet demand, while EOQ orders in discrete batches.
• Suitability: POQ is suitable for cyclical production environments, while EOQ is suitable for businesses with stable demand.

POQ is an effective inventory management model, especially suitable for businesses operating in cyclical production environments. With this model, businesses can maintain continuous production, better respond to fluctuating market demand, and increase long-term profits. EOQ and POQ can be selected depending on the type of production and specific needs of each business to optimize costs and performance.

POQ is an effective production and inventory management model, specifically designed to suit the cyclical production environment. With the POQ model, products will be produced in large batches instead of discrete orders, helping businesses easily adjust inventory levels based on actual demand. Businesses facing volatile markets can take advantage of the POQ model to maintain production efficiency, optimize costs, and increase revenue, ensuring long-term profits.

Contact Intech for detailed advice on POQ solutions for your business. Intech is committed to providing optimal production solutions, helping you manage inventory effectively and maintain a competitive advantage in the market.

References:

• Automated inventory management

• hat is production management?