A MOQ (minimum order quantity) agreement is one type of the many contracts often between a vendor or supplier, such as a non-OEM components manufacturer, and a OEM manufacturer (or contract electronics provider) in which the OEM buyer agrees to purchase a minimum quantity of components from the vendor or supplier over a specified period of time.
MOQ agreements are often used in situations where the OEM (or contract electronics provider) has high fixed costs and needs to sell a certain volume of goods in order to break even or make a profit.
The minimum order quantity (MOQ) specified in the agreement is usually a number of units or a dollar value of goods, and the buyer is obligated to purchase that minimum amount over the agreed-upon period of time. The supplier, in turn, agrees to provide the components at a specified price and delivery schedule.
One benefit of a MOQ agreement is it can help vendors and suppliers to plan and forecast production better, and also gives the buyer (OEMs and contract electronics providers) the opportunity to purchase and pipeline components at a lower price per unit, as both manufacturers (OEM and CM) are able to spread the fixed costs over a larger quantity of goods, or customer programs. (Read more about contract electronics industry terms and definitions)
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MOQ agreements are commonly used in manufacturing and wholesale (white box and ODM) industries, but can be applied in any industry where a vendor or supplier has high fixed costs.
Materials obligation reduction (MOR) clauses and agreements
A materials obligation reduction (MOR) agreement is one of types of contracts used in the electronics manufacturing industry that outlines the material requirements and expectations of both the manufacturer and the customer.
While MOR agreements have some advantages, such as ensuring supply chain management transparency and reducing costs, there are also some potential disadvantages to consider, outline below.
MOR agreement clauses can limit a manufacturer’s ability to make changes to the contract electronics provider’s production process or materials used. This can be problematic if unforeseen issues arise during the manufacturing process or if the customer’s needs or product or program requirements change.
There is also a potential for increased risk because MOR agreements typically require manufacturers to purchase a specific amount of materials upfront, and if market demand for the product does not meet expectations this can result in excess or inadequate inventory management, which can be costly for contract electronics providers to warehouse and may ultimately result in lost profits for providers and requiring additional costs and fees passed on to OEM customers.
MOR agreement clauses can also require contract manufacturers to only purchase components and materials from specific, or approved, vendors and suppliers, which can limit the ability for contract manufacturers to find the best quality components and materials at the most competitive prices. This can also make it difficult to adapt to changes in the market or to take advantage of new technology or materials or, to purchase components at favorable spot rates. (Read: Difference between CM, CEM, EMS, ODM, JDM providers)
If the terms of the MOR agreements or clauses are not clearly defined, disagreements between the contract manufacturer and OEM customer can surface, which can lead to legal disputes and delays in production.
Overall, MOR agreements can be beneficial in some situations, they may not be the best fit for every electronics manufacturing contract. It is important to gain insight into best practices, vs practices common in contract manufacturing industry contracts, and carefully weigh advantages and disadvantages of MOR agreements before entering into one, and to ensure that the terms are clearly defined and agreed upon by all parties involved.
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