Make to Stock vs Make to Order: What is Right for Your Business?Time to read: 5 minutes
Streamlining your production from the manufacturing facility begins with a choice. You must decide between make to stock vs. make to order at the start of the operations optimization process.
In the make to order (MTO) approach, advanced planning and scheduling procedures are not activated. Orders are not added to the production queue until there’s a purchase order, work order, or sales order for a product. The make to stock (MTS) strategy depends on anticipated consumer demand for goods production and manufacturing.
After all, most manufactured goods are constantly subject to new technological advancements and market trends. If your planning strategy stays the same, you might lose out on benefits that another approach might provide.
In most cases, this is a simple choice. Custom products get manufactured to order since you can only begin production after knowing what the final product will be. However, there are exceptions to everything else. Efficient inventory control is a never-ending process of constant improvement.
Your business needs a hybrid approach, depending on the situation. This way, you can swap processes anytime it needs to adapt to meet demand. We must understand how each method works to see the bigger picture in this debate of make to stock vs make to order.
Make to Stock Explained
Producing or manufacturing goods following anticipated consumer demand is known as “make to stock” or MTS. In other words, items are kept on hand for future sales after they get produced. This approach extensively uses forecasting to estimate how high or low future demand is. Based on these assumptions, your business modifies its production rates to satisfy potential demand.
With MTS, the customer wants their item immediately. This requires a high level of material availability and efficient delivery performance. Having a large inventory is one way to accomplish this. But keeping many expensive goods on hand can be a problem. As a result, the production system is optimized for a trade-off between inventory quantity and material availability for MTS.
Lean lead times are a vital benefit of make-to-stock production. Specialized firms typically use repetitive manufacturing to produce batches of comparable goods quickly. These products can be shipped to buyers as soon as orders are received. They are already in stock at nearby distribution facilities for even faster delivery.
Another significant benefit of MTS manufacturing is that it is easier to adopt and more efficient due to the reduced product features. Due to fewer equipment changes that result in bottlenecks, the manufacturing lines can be configured to operate effectively.
Make to stock is heavily reliant on forecast accuracy. There is always a chance that firms will produce more goods than needed. These goods will require storage, which could result in damage or spoiling. Also, this extra stock can never be sold, which could result in paying a disposal fee. Be aware of these possible risks when choosing to go MTS.
An example of MTS manufacturing would be a company that produces goods for a specific season. A business that sells Christmas decorations will see its demand increase during the holiday season. They can easily forecast the potential demand because of the expected interest during a specific period.
Understanding Make to Order
Made to order (MTO)t enables customers to acquire goods tailored to their requirements. This procedure produces items only after a confirmed customer order has been received.
The capacity to fulfill an order with the precise product specifications set by the customer is the fundamental benefit of the MTO system. Additionally, it can reduce finished item inventory, sales discounts, and stock obsolescence gets controlled. An MTO system must, however, be used in conjunction with proactive demand management to succeed. Take note that not all products are suitable for the MTO system.
Since products only get manufactured when there is a strong demand from customers, this method is known as a pull supply chain operation. The assembly industry uses the pull-type production model when only one or a few units need to be made to meet product specifications. This includes specialized sectors like construction, ship and aircraft manufacturing, and so forth. MTO is also suitable for highly customized goods like computer servers, cars, bicycles, or costly goods to maintain in stock.
Lead times will vary, which means consumers will have to wait longer. Because manufacturing is delayed until receiving the order, ensure you have fast lead times.
Make To Stock Vs. Make to Order: Choosing the Right Approach
The difference maker when considering make to stock vs. make to order is the type of supply chain operation. MTO uses a supply chain that operates on the principle of “pull,” where customer demand drives product production. While MTS uses a supply chain in which expected customer demand “pushes” the production of the product.
For MTO planning to create a plan or timetable, you start with order fulfillment. Then move backward through the production process. The start of make to stock production occurs at the supply end of the manufacturing cycle, which “pushes” output. MTS planning begins with getting raw materials and components for the finished product.
Make to stock planning aims to produce an inventory, or “stock,” of finished goods during a period that will satisfy orders. Business owners have previously forecasted this demand. Planning and scheduling are based on anticipated product demand. Manufacturing operations are finished before the sales orders are received.
On the other hand, make to order manufacturing processes are finished following the receipt of each sales order. The sales order serves as the basis for the production work order. Finished stock levels and intermediate products are not important process parameters in MTO planning. Instead, it emphasizes preserving production readiness and workflows through effective and timely supply inventory replenishment.
Overall, you must choose whether you want all your products to be MTO vs MTS. This is true not only for the finished goods but also for the materials and subcomponents. Do you manufacture your subcomponents to stock or to order? You can choose between purchase-to-stock (PTS), where you buy material in advance. Do this if you want to sell it later as part of a client order. Alternatively, you may choose purchase-to-order (PTO), where you buy material only when you need it for customer purchases. Overall, this is a cost-benefit concern. Make-to-order runs the risk of losing sales or customers for delayed production. Make to stock has higher inventory-related costs.
Quantity produced is a critical factor when choosing between make to stock vs. make to order. It is easier to manufacture and stock an item the more of it is needed. But it isn’t always as simple as it seems. Be sure to take note of the seasonality and actual demand for the items. Let’s say, for example, you make water jugs that sell for 10,000 units a year. Usually, you would think this would fall under MTS. Most of the time, this assumption is correct. But what if these jugs are a one-time order by another company that intends to give them away to their clients as a special anniversary gift? Though the jug is sold in large quantities, customizing it falls under MTO production.
Using the same example, your company also sells a trendy sports bottle. Because it is a popular product all year round, it would make sense to use the made to stock process.
Whichever method you choose for your company, exploring the use of advanced planning and scheduling (APS) software is a great idea. APS software has become essential for modern manufacturing operations. This is due to increased consumer demand for a varied product mix and quick delivery. Companies can readily integrate enterprise resource planning software with APS to close gaps in product planning and scheduling accuracy and flexibility. APS software gives planners more agility when constantly updating changing priorities, production schedules, and inventory plans. It also helps to save time.
If you’re still not sure which process is ideal for you, remember the following:
When creating complex products with many customer-customizable features, make to order is the most effective strategy.
When there is little variety between the products you create and limited customization on orders, make to stock is the preferred method.
Although each workflow comes with its own set of risks, it is a good idea to base your choice on the complexity of your product and the market need for it.
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