Apr 23, 2023:
In today’s rapidly evolving business landscape, companies face the challenge of balancing efficient production processes with meeting customer demands. Two popular strategies employed by businesses are “make to stock” (MTS) and “make to order” (MTO). While MTS involves producing goods in advance of customer orders, MTO focuses on manufacturing items only after receiving specific customer requests. This blog explores the benefits and drawbacks of each approach, shedding light on how companies can optimize their production strategies to minimize costs and satisfy customer expectations.
Make to stock refers to the practice of producing goods in anticipation of customer orders. By creating a large quantity of products and storing them in inventory, companies can promptly fulfill customer requests from existing stock.
MTS is particularly advantageous for products with consistent demand, enabling cost-effective bulk production and eliminating the need for order-specific manufacturing.
Benefits of MTS
1. Quick Order Fulfilment
With goods readily available in inventory, MTS empowers companies to swiftly respond to customer orders, ensuring prompt delivery. This advantage holds special significance in fast-paced industries like fashion, where speed is vital to customer satisfaction.
2. Mitigating Stock-Out Risks
Maintaining a substantial inventory reduces the likelihood of running out of stock. Companies can meet unexpected surges in demand without disappointing customers, fostering loyalty and preserving revenue streams.
Drawbacks of MTS
1. Demand Forecasting Challenges:
Accurately predicting customer demand can be demanding, as fluctuations in market dynamics may lead to either excess inventory or shortages. Excess inventory incurs storage costs and requires potential markdowns, while shortages result in lost sales opportunities.
2. Cost Implications
Producing goods in bulk for MTS can be cost-effective, but when demand varies significantly, companies may face increased expenses due to excessive inventory and potential write-offs.
Make to Order (MTO)
Make to order involves manufacturing goods only after receiving customer orders. By tailoring production to individual requests, companies can offer customized products while avoiding the costs associated with producing items that may remain unsold. MTO is particularly suitable for products with low or unpredictable demand.
Benefits of MTO
1. Customization and Personalization
MTO allows companies to create products that cater to the unique needs and preferences of individual customers. This flexibility is especially valuable in industries like furniture or clothing, where customization is highly sought after.
2. Minimizing Excess Inventory
By producing goods on a per-order basis, MTO helps companies avoid accumulating surplus inventory. This mitigates the risk of storage costs, obsolescence, and potential markdowns.
Drawbacks of MTO
1. Longer Lead Times
Since production only begins after receiving customer orders, MTO may result in longer lead times. For industries characterized by fast turnaround times, customers might be reluctant to wait, potentially impacting customer satisfaction and retention.
2. Increased Costs
Manufacturing products on a per-order basis can be costlier than bulk production in MTS. MTO requires additional resources, customization processes, and coordination, leading to higher per-unit expenses.
Choosing Between MTS and MTO: Factors and Considerations
The choice between MTS and MTO hinges on several factors, including product nature, demand level, and production costs. Each approach offers unique advantages and drawbacks, and selecting the most suitable strategy necessitates careful evaluation of a company’s specific circumstances.
In the dynamic world of business, companies must adopt production strategies that optimize efficiency and meet customer demands. Whether choosing the MTS approach, where goods are produced in anticipation of orders, or the MTO approach, which tailors production to individual requests, businesses must consider factors such as demand predictability, customization requirements, and the company’s production capabilities. Additionally, market research and customer feedback play a crucial role in determining the most appropriate strategy.
Ultimately, there is no one-size-fits-all solution when it comes to selecting the ideal production strategy. Companies may even employ a combination of MTS and MTO, known as hybrid production, to leverage the benefits of both approaches. This hybrid approach allows businesses to maintain a baseline inventory for high-demand products while offering customization options for unique customer requests.
Furthermore, advancements in technology and data analytics have empowered companies to enhance their demand forecasting capabilities. By leveraging historical data, market trends, and customer insights, businesses can make more accurate predictions, reducing the risks associated with both excess inventory and stock-outs.