One of the tradeoffs supply chain management must make at the beginning of the operations optimization process is a choice between the make-to-order and make-to-stock type of manufacturing process. The make-to-order (MTO) approach waits until a purchase order, work order, or sales order is created for a product before the advanced planning and scheduling process is engaged and this order is placed into the production queue. The make-to-stock (MTS) approach relies on forecasted customer demand to produce and manufacture goods.
The major difference between the two is that make-to-order requires a customer to order beforehand, whereas make-to-stock does not. Make to order works on the basis that a product need not be produced until a customer requires it, but make to stock works on the assumption that a customer will require the product eventually, and thus it should be made beforehand.
From a business perspective, make-to-order is known as a pull method of production, because what a business produces is based solely on what the customers demand. Make to stock on the other hand is known as a push method because the business produces a product with nothing but sales forecasts to determine what they ought to create and how much of the product ought to be created - essentially, they are 'pushing' their product into customers hands.
The make-to-order environment, whether the sub-category is engineer-to-order or assemble-to-order, thrives in fulfilling the demands of customers who crave mass customization. These customers demand the personal touch and want to have more control over the look, feel, and functionality of the finished goods. Make to order improves customer satisfaction by making this possible.
Another big advantage in a make-to-order environment is that there is practically no waste at all because a business is only responding to what a customer actually needs.
One of the main disadvantages of the make-to-order business process is the long lead times. Lead times or the time from when a customer places and receives their order, increase with make-to-order manufacturing because the high variability of product parts and designs increases manufacturing complexity. This places significant stress on:
The result is lower efficiency and higher production costs. These are often offset by the fact that consumers are willing to pay more for customized products, but these costs need to be carefully analyzed and controlled.
A big advantage of make-to-stock production is shortened lead times. In these environments, the manufacturers usually utilize repetitive manufacturing to produce batches of similar goods in succession. These products are then available to ship to customers as soon as the orders come in. In many cases, they are already in stock in local distribution centers for even faster delivery.
Another big advantage is that, due to fewer product features, make-to-stock production is generally much simpler and more streamlined. The production lines can be set up to run efficiently because there are fewer equipment changeovers that introduce bottlenecks. The demands on the production systems like the:
are reduced and that means you don't have to upgrade systems that would otherwise already be obsolete in a modern make-to-order environment.
The main disadvantage of make to stock is that you are really relying on the accuracy of your forecast. There is always the risk that more products will be created than sold. These products will need to be stored, which may lead to damage or spoilage. There is also the risk that this excess inventory will never be sold at all and may even end up costing the manufacturer a disposal fee.
A prominent example of a make-to-order business approach is a small bakery that specializes in cakes for special events such as birthdays, weddings, and anniversaries. These businesses do not create ten wedding cakes a day hoping somebody will come into the bakery and take one home. Instead, they wait for a customer to approach them with an order. Then they will discuss the wishes of the customer and create a personalized cake that meets the customers' requirements. It may take longer for the customer to get their product, but there will be no waste from the bakery, and the customer will receive exactly what they wanted.
An example of a make-to-stock business approach is a large video game company like PlayStation or Xbox. The success of previous consoles that they have created gives the two companies confidence in future products. As such, their recent launch of the Playstation 5 and Xbox One was made to stock. They did not wait for customers to show interest before producing millions of products, because they knew that the demand would be there because of past successes and sale forecasts for the future.
Although at first, make-to-order and make-to-stock approaches may seem similar, the approach a business takes is essential and these two differ wildly in terms of how a product is created. Either approach can be successful, but a business will need to decide which best suits their product specifically.
You may be able to get away with your existing manufacturing systems in a make-to-stock environment, but the modern make-to-order production facility is just way too complex. You will need a modern, planning and scheduling system that can fully model your production environment through configuration. You will also need a system that is capable of fast optimization so that you can generate accurate plans and schedules in real-time.
Optessa is the planning and scheduling system that Fortune 100 manufacturers trust to schedule production throughout hundreds of their factories, across the globe. Contact us for a free demo and consultation to learn how Optessa can help take your planning and scheduling to the next level.