A complete guide to calculating optimal production order quantity and streamlining the production planning-side of your business growth.
Want to grow your direct-to-consumer (DTC) brand? It all starts with prioritizing your production planning. And that means getting your production orders, which provide important details for manufacturing and fulfillment workflows, right.
But what exactly are production orders? And how can you use them to your brand’s advantage? Let’s find out.
What is a production order for DTC?
A production order is a document that guides DTC brands in converting purchased materials into manufactured goods. More specifically, production orders help route raw materials through the manufacturing stages in your supply chain by stating how many units will be manufactured and by what date.
This documentation is integral to your brand's retail operations. That's because production orders contain:
- A bill of materials (information about the materials required, selected materials, and previously used materials in manufacturing cycles)
- The production run size (how many units will be produced based on consumer demand and manufacturer’s capacity requirements)
- The sequence of operations (including when production starts and ends at each supply chain stage).
When you submit this document to your manufacturer, they will provide you with production order confirmation. This confirmation, well, confirms that your supply chain partners can complete your planned order within your desired timeline.
What is production order quantity (POQ)?
Before manufacturing can really get rolling, companies have to determine the scope of their production orders. Meaning, how much they will produce to satisfy consumer demand.
Production order quantity (POQ) describes the optimal size of a production run. In simple terms, the POQ tells your business how much to produce and when that production run should be completed.
Most DTC brands can find their POQ by referring to their planned costs (like inventory and ordering costs). These numbers reveal the amount you previously ordered and what you spent on production so you can avoid overstocking or going over your budget.
But calculating your optimal order quantity sets the stage for future manufacturing. And it ensures you don’t produce more than is necessary to meet demand.
3 basic types of production orders
There are 3 basic types of production order issuance available to DTC brands: made to stock, made to order, and made to assemble.
Made to stock (MTS)
Made to stock (MTS) is a process where finished goods are manufactured based on projected or anticipated consumer demand.
In other words, products are stocked ahead of future sales that haven’t happened at the time of production. Those products are then stored at your warehouse or distribution center while awaiting fulfillment.
As you probably guessed, MTS relies heavily on demand forecasts and real-time data to dictate order volumes. This information impacts your production work orders and makes sure you have enough products to satisfy demand without manufacturing excess.
Made to stock is the ideal production order status for fast-moving SKUs (products that sell quickly and at a relatively low cost). This includes consumable, packaged goods like toothpaste, soap, beverages, cosmetics, and so on.
But even though MTS is the most popular production model, it has a few drawbacks. The main issue is having to build up substantial amounts of inventory, which can escalate your carrying costs and create more waste if those products spoil.
That’s why it’s so important to have accurate inventory forecasts to help you keep the right amount of inventory on hand (without triggering an expensive overstock).
Made to order (MTO)
Made to order (MTO) is when production orders are generated according to actual consumer demand. That is, items are produced for the individual customer who ordered them.
The MTO strategy allows consumers to purchase customized products made to their specifications.
Nike does this by letting shoppers create custom-designed sneakers via their online template. Each order number is then manufactured after customers complete their purchase.
This customization is what helps MTO stand out among the other types of production orders.
What's more, the MTO model also massively cuts down on waste (since your brand can stock little to no inventory at any given time). And less available inventory means less of an opportunity for dead stock at your warehouse or on your shop floor.
That said, items made to order tend to have longer lead times than MTS products. For example, customized automobiles can take weeks or even months to assemble — and that's not factoring in potential supply chain disruptions.
Just last year, BMW ran into this issue because of a significant semiconductor chip shortage. In fact, they started shipping vehicles without their touchscreen functionality due to the chip shortage. This left customers frustrated and led to lost sales.
Taking this lesson from BMW, if your brand decides to go the made-to-order route, ensure your manufacturer has all the necessary parts and materials available.
By focusing on this sort of material requirement planning (MRP), all your products can be assembled quickly and shipped to your customers within a shorter time frame. This saves your brand money and keeps your customers happy, too.
Made to assemble (MTA)
Made to assemble (MTA) falls somewhere between made-to-stock and made-to-order production. Essentially, a manufacturer will stock the basic requirements for production but wait until orders officially come through to create any finished goods.
In many ways, made to assemble tackles the issues related to MTS and MTO models and resolves them through its own hybrid business process.
And since MTA operates based on actual customer orders, it avoids the risk of overstocking, often seen with made-to-stock manufacturing.
That said, made to assemble still uses demand forecasts (like MTO does) to maintain efficiency within your production workflows.
The MTA method is a relatively low-cost option for manufacturers because it comes with minimal stocked goods and materials, reducing storage fees.
Made to assemble is often used for bespoke products (like personal computers) because they can be manufactured in less time than made to order goods.
Dell Technologies is a prime example of this. It has an assemble-to-order business model for all its laptops and personal computers. They also allow customers to choose from various hardware and software options, thus adding space for customization.
For instance, Dell's Inspiron 27 7000 All-In-One model has 8 opportunities to customize the final product. This includes options like processor, memory, and hard drive sizes.
How DTC brands use production orders
Production orders determine whether your brand sinks or swims. When done well, production orders empower DTC brands to enhance their production planning, optimize expenses, and increase revenue to drive growth.
Enhance production planning
Production planning is a roadmap for carrying out the production process. This type of inventory planning considers:
- What you need to produce (based on demand)
- How much you need to make (based on minimum order quantities)
- When to begin manufacturing (based on weeks of supply)
Luckily, production orders provide all these details in one fell swoop. This way, everything you need to know for manufacturing is contained within a single document.
For most DTC brands, production planning is a long-term, ongoing practice that ensures all your resources and materials are ready whenever you need them.
But you can further streamline your production planning with the help of a proficient operations platform like Cogsy.
With an operations software, you gain incredible visibility into your future inventory needs (which directly impacts your production orders).
Plus, this software can improve your relationships with manufacturers by helping you communicate your production plans up to 12 months in advance. This level of transparency not only forms stronger connections but also gives you leverage to negotiate better vendor terms.
Optimize expenses and improve budgeting
It’s easy to waste money when making decisions on a whim.
Without proper planning and real-time inventory data, your brand is bound to limit its order accuracy and increase production costs.
On the flip side, when you use operational data and forecasting insights to guide your production orders, you can significantly optimize your DTC operations.
Making more informed production orders reduces your risk of overstocking (which can be super costly). Not to mention it improves your brand’s budgeting efforts, too.
How so? Production order quantity references previous inventory costs. With this information, you can double-check how much you spent in the past to ensure future orders fall within your budget.
In other words, data-based production orders prevent you from overspending on excess inventory and storage costs, so you can easily stick to your budget.
Increase revenue and drive growth
Optimized expenses lead to more revenue. After all, if you’re not wasting money on production, you free up a lot of working capital. And this available capital can be a driving force for your brand’s growth.
It takes some serious cash flow to support new product production, ramp up promotional campaigns, and create an elevated customer experience.
But you can easily finance these growth initiatives when you have extra money in the bank (thanks to your streamlined production planning).
It’s sort of a cyclical, symbiotic relationship. Production planning helps you generate better orders, preventing overstocking and compounding carrying costs. Ultimately, this benefits your company’s bottom line.
And in turn, you can invest that reclaimed revenue in taking your brand to the next level. That might mean using that extra capital to increase demand and scale production to match.
Production order quantity formula
As you know, production order quantity is the optimal size of a production run. To calculate POQ for your DTC brand, you’ll need to use the following formula:
POQ = √ [(2DS) ÷ H(1 - d/p)]
Note that in this equation:
- D = annual demand
- S = setup costs
- H = holding costs
- d = daily demand
- p = daily production
Example of production order quantity calculation
Let's say your brand sells jigsaw puzzles direct-to-consumer, and you're in production 300 days out of the year.
You receive orders for ~12,000 puzzles each year, and your production facility can make 100 units per day. Setup fees for your puzzle business cost $50, and the holding costs to store your products are $0.10 per puzzle.
The variables you'll need to use breakdown like this:
- Annual demand (D) = 12,000 units per year
- Setup costs (S) = $50 setup fees
- Holding Costs (H) = $0.10 per unit per year
- Daily demand (d) = 40 units per day
- Daily production (p) = 100 units per day
With this information, you can calculate your unique production order quantity.
POQ = √ [(2 x 12,000 x 50) ÷ 0.10(1 - 40/100)] = 4,472
In this example, your optimal order size is 4,472 units per production run.
Although this formula supports effective inventory management for your manufacturers, it's time-consuming to constantly rerun this calculation. Luckily, there's an easier way to find your ideal production orders.
Simplify production orders with Cogsy
With Cogsy's production order feature, you get visibility into your inventory needs for the next 12 months.
Meaning, you can map your brand's production schedule a full year out and be prepared to meet any and all the demand you generate. (Cogsy even adjusts this plan accordingly as new information is introduced.)
Lalo, a leading DTC brand in the baby space, even used Cogsy's production order feature to share their inventory needs for the next 12 months with their vendors. And by doing so, the Lalo team cut their purchase order down payments by 50%, freeing up cash to further fuel the company's 400% year-over-year growth.
On top of that, you can also use Cogsy to:
- Accurately calculate demand for new (and old) products
- Factor marketing promotions into your inventory needs
- Create production orders in only a few minutes
- Always place orders at the ideal time with replenish alerts
- Avoid stockouts and overstock with smarter production orders
But don't take our word for it – try Cogsy free for 14 days and see for yourself. Schedule a quick call to get your free trial set up today.
Production order FAQs
Get answers to the most common production order questions.
What is production order management?
Production orders are documents routing raw materials through the various manufacturing stages in a retailer's supply chain. Production order management, then, is the process of organizing and overseeing these orders to optimize the production workflows.
What does a production order form usually include?
Typically, a production order form includes information about your brand's manufacturing schedules (like how many units to produce and when), the status of materials required, and materials previously used in manufacturing cycles. These details will impact your budget and production timeline.
What is the difference between a sales order and a production order?
A sales order (or receipt) is a document from the seller to the customer confirming the quantity, quality, and price of exchanged goods or services. A production order, on the other hand, is a document from a retailer to a vendor requesting a specific number of units be manufactured and the desired production timeline.