In the world of manufacturing and production, two strategies often take center stage; “Make to Order” (MTO) and “Make to Stock” (MTS). Both approaches have their merits, drawbacks, and applications.
Businesses must understand the differences between make to order vs make to stock to choose the approach for their operations. In this article, we will go into the intricacies of these methods, and compare them on various fronts.
Make to Order vs Make to Stock: Defining the Terminology
Before going into this manufacturing oriented topic, let’s understand what these terms stand for:
Make to Order (MTO): MTO refers to a production strategy where items are manufactured after receiving a customer order. The process begins with placing an order and concludes with delivering a customized product. This ensures the product is tailored to the customer’s requirements and preferences.
Make to Stock (MTS): MTS is a production approach where items are manufactured based on demand forecasts before actual sales orders are received. These products are then stored in inventory and are made readily available for shipment once a customer places an order. The objective is to maintain product supply in anticipation of customer demands.
A Comparative Analysis
When choosing between make to order vs make to stock, the decision often relies on factors. The disparities between these two strategies have an impact on aspects of production.
Now, let’s delve even further into a more comprehensive analysis between them, and their impacts:
Inventory Levels
One notable advantage of MTO is its inventory levels. Since items are manufactured based on confirmed orders, no production results in storage costs and space requirements. This makes it particularly suitable for businesses with storage facilities or products with short shelf life.
With MTS, businesses usually maintain inventories to promptly fulfill orders. This requires investments in warehousing and inventory management systems. While it ensures product availability, it also introduces risks such as inventory obsolescence or spoilage.
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Customization and Product Variety
The make to order strategy excels when customization is crucial. It allows businesses to tailor products according to customer specifications providing a customer experience. This can be a selling point for niches that value products.
A make to stock approach leans more towards standardization. While it may offer product variations, the level of customization is limited. It is most suitable for markets that have a demand for products and where customization does not play a significant role in differentiation.
Lead Time and Responsiveness
Due to its nature, MTO often requires lead times. Production begins after order confirmation, which means customers may have to wait to receive their orders. This can be a disadvantage in markets where fast delivery is expected.
With products in inventory MTS ensures prompt order fulfillment. This quick turnaround time is particularly advantageous in industries where speedy delivery provides an edge, such as fashion or consumer electronics.
Production Efficiency and Costs
The production batches in MTO are typically smaller. While this allows for customization, it can result in inefficiencies due to setup changes leading to higher per-unit production costs.
The mass production model of MTS takes advantage of economies of scale. Large production runs generally result in per-unit costs due to operations and bulk purchasing discounts.
Demand Forecasting and Market Volatility
MTO businesses have the advantage of relying on market demand predictions. They respond directly to demand, minimizing risks associated with market volatility or forecasting errors.
When it comes to the MTS strategy, businesses need to have skills in forecasting demand. The success of this approach relies on market predictions to determine production levels. If the forecasts are inaccurate, it can result in issues such as production or missed sales opportunities.
Assessing the Implications
There is no need for MTO businesses to keep inventories, which helps minimize capital tied up in unsold goods. However, having an agile supply chain might come with costs, especially when procuring materials on short notice.
On the other hand, MTS companies face financial risks due to investments in inventories. While they may have the potential for sales volume and quicker cash flow, having inventories can lead to markdowns that impact profitability.
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Understanding Supplier Relationships
In the make to order vs make to stock analysis, the supplier relationship has to be evaluated properly. MTO businesses often require flexible supplier relationships because of the unpredictability of orders. They need a robust supply chain that can quickly procure materials or components as needed.
In contrast, MTS companies can establish long-term contracts with suppliers since mass production is predictable. This allows them to benefit from bulk order discounts and ensures a supply.
Which Approach Is Right for Your Business?
The decision between depends on many factors including but limited to:
Product Type: Customized high-value products like luxury cars or jewelry are usually better suited for the make to order approach. On the other hand, mass-produced items like consumer goods are typically produced using the make to stock method.
Customer Preferences: If your customers prioritize customization over delivery, then make to order might be more suitable. However, if quick delivery is important, opting for make to stock would be preferable.
Operational Capacity: Consider whether you have the resources and capabilities to manage inventories effectively. If not, selecting the same MTO approach might be a wise choice in this scenario, too.
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In Conclusion
Choosing the appropriate approach in these regards can significantly impact manufacturing related activities. The key lies in comprehending the intricacies of each method, evaluating them based on your business requirements, and making a decision.
Regardless of which strategy you choose, the ultimate goal remains consistent: providing value to your customers while optimizing efficiency.