Make to Order (MTO): How it helps Business to grow?

Understanding Make to Order (MTO) and Make to Stock (MTS) Strategies

Make to Order (MTO) and Make to Stock (MTS) are an important business decision that helps to manage the Inventory. Each business has different strategies depending on Customer needs and how fast you want to deliver. Important to note is the Inventory Carrying Costs, How much accuracy is your forecast and Confirmed Orders from Customer. Important to note is cash flow management with in the company.

This is where a question arises to decide “make to order vs make to stock”

Let’s understand how these strategies works? Why manufacturing inventory management depends on these strategies? How consumer demand influences these decisions?

What is Make to Order (MTO)?

Make to Order (MTO) is a production strategy where products are manufactured or customized based on specific customer orders. In the MTO approach, businesses begin the stock production process only after receiving an order, ensuring that each item is tailored to meet the customer’s exact requirements. This strategy is commonly adopted for unique or personalised products or customizable products that cannot be easily mass-produced.

This needs a manufacturing strategy with a minimum production volumes to be planned with a clear production efficiencymodel too. Because these can’t be a mass production model. Please note Custom products are more expensive and unique to a consumer demand than a standardized products costs.

MTO meaning and how it works with an Example to understand it better

ABC Furniture is a high-end custom furniture manufacturer that specializes in creating bespoke pieces tailored to individual customer preferences. When a customer places an order for a custom dining table, ABC Furniture follows a “Make to Order” approach to fulfill the request.

1. Customer Order: A customer contacts ABC Furniture and provides specific details about their desired dining table, including dimensions, wood type, finish, and design preferences. The customer also selects the number of seats and any additional features they want, such as extensions or custom inlays.
2. Design and Quotation: ABC Furniture’s design team works closely with the customer to create a detailed design drawing and 3D renderings of the custom dining table. Based on the design and customer requirements, ABC Furniture prepares a quotation that includes the cost of materials, labor, and any additional customizations.
3. Order Confirmation and Production: Once the customer approves the design and quotation, they place the order with ABC Furniture. At this point, the “Make to Order” process begins. The production team reviews the order specifications and creates a production schedule.
4. Procurement of Materials: The production team procures the required materials, such as high-quality wood, custom hardware, and finishing materials, based on the customer’s chosen options.
5. Manufacturing Process: The skilled craftsmen at ABC Furniture start the manufacturing process according to the approved design. They cut the wood pieces, assemble the table, and apply the chosen finish. Each step is carried out with meticulous attention to detail to ensure the highest level of craftsmanship.
6. Quality Control: Before the dining table is ready for delivery, ABC Furniture’s quality control team thoroughly inspects the finished product to ensure it meets the company’s stringent quality standards. Any minor adjustments or refinements are made during this stage to ensure the table’s perfection.
7. Delivery and Installation: Once the custom dining table passes the quality control check, it is prepared for delivery. ABC Furniture’s delivery team ensures the safe transport of the table to the customer’s location. If required, ABC Furniture provides installation services to ensure the dining table is correctly set up in the customer’s home.
8. Customer Satisfaction: The customer receives their beautifully crafted custom dining table, tailored to their exact specifications. The personalized experience and attention to detail impress the customer, leaving them highly satisfied with their purchase.

In this example, ABC Furniture’s “Make to Order” approach allows them to create unique and personalized dining tables that cater to individual customer tastes. The process ensures that each piece is crafted with precision and care, delivering a high level of customer satisfaction and reinforcing ABC Furniture’s reputation for quality and craftsmanship.

What are the advantages of Make to Order (MTO)?

a. Customization: MTO allows businesses to offer personalized products, catering to individual customer preferences and creating a unique selling proposition.

b. Reduced Inventory Costs: With MTO, businesses produce items based on actual demand, reducing the need for excessive inventory storage and minimizing inventory holding costs.

c. Minimized Product Obsolescence: Since products are made in response to specific orders, the risk of producing excess inventory that may become obsolete is significantly reduced.

d. Better Resource Utilization: MTO helps optimize resource allocation, as production is focused on fulfilling customer orders rather than speculative stockpiling.

e. Enhanced Customer Satisfaction: Offering customized products through MTO can lead to higher customer satisfaction and brand loyalty.

What are the disadvantages of Make to Order (MTO)?

a. Longer Lead Times: As production begins only after an order is received, MTO can lead to longer lead times compared to ready-made products available off-the-shelf.

b. Complex Planning and Scheduling: MTO requires careful coordination of production schedules and raw material availability to ensure timely order fulfillment.

c. Higher Production Costs: MTO may result in higher production costs due to smaller batch sizes and the need for customization.

d. Order Fluctuations: Demand fluctuations may pose challenges in managing production capacities and may lead to capacity constraints during peak periods.

What is Make to Stock (MTS)?

Make to Stock (MTS) is a production strategy where products are manufactured based on forecasts and stored in inventory before receiving customer orders. In the MTS approach, businesses anticipate demand and produce items in bulk to have them readily available for immediate delivery upon order placement.

MTS meaning and how it works with an Example

XYZ Electronics is a leading manufacturer of smartphones. To meet the high demand for their popular model, the “TechPro 5000,” XYZ Electronics adopts a “Make to Stock” approach to efficiently produce and stock the smartphones.

1. Forecasting Demand: XYZ Electronics conducts market research and analyzes historical sales data to forecast the demand for the TechPro 5000 smartphones. Based on the projected demand for the upcoming quarter, they estimate the quantity of smartphones they need to produce.
2. Production Planning: With the demand forecast in hand, XYZ Electronics plans the production schedule for the TechPro 5000 smartphones. They determine the production quantity and set the target inventory level they want to maintain to fulfill customer orders promptly.
3. Procurement of Components: To ensure uninterrupted production, XYZ Electronics procures the necessary components, such as processors, screens, batteries, and other hardware, based on the production plan.
4. Bulk Production: Using an assembly line process, XYZ Electronics starts bulk production of the TechPro 5000 smartphones. They manufacture a large batch of smartphones in one continuous production run, optimizing the production process for efficiency and cost-effectiveness.
5. Quality Assurance: Throughout the production process, XYZ Electronics maintains strict quality control measures to ensure that each smartphone meets the company’s high-quality standards. Random quality checks are performed at various stages of production to identify and address any defects.
6. Inventory Management: Once the smartphones are manufactured, they are stored in XYZ Electronics’ warehouses as finished goods. The inventory management team ensures that the stock levels are regularly monitored to maintain sufficient quantities to meet customer demand.
7. Sales and Distribution: When a customer places an order for the TechPro 5000 smartphone, XYZ Electronics fulfills the order from the existing stock. Since the smartphones are already produced and available in inventory, they can be shipped to the customer immediately.
8. Replenishment: As smartphones are sold, the inventory levels gradually deplete. To maintain the desired stock level, XYZ Electronics monitors the sales data in real-time and initiates another production run to replenish the stock before it runs out.
9. Seasonal Demand: During peak seasons or promotional events, XYZ Electronics ramps up production to build a surplus of TechPro 5000 smartphones to meet the expected surge in demand.
10. Product Updates: As the company introduces newer versions or updates to the TechPro 5000 smartphone, XYZ Electronics adjusts its production plan to accommodate the launch of the new models while still fulfilling orders for the existing version.

In this example, XYZ Electronics effectively manages the production and inventory of the TechPro 5000 smartphones through the “Make to Stock” strategy. By forecasting demand, producing smartphones in bulk, and maintaining sufficient inventory levels, they can meet customer orders promptly, efficiently utilize resources, and capitalize on market demand, solidifying their position as a reliable and responsive smartphone manufacturer.

What are the advantages of Make to Stock (MTS)?

a. Shorter Lead Times: MTS allows for immediate order fulfillment since products are already available in inventory.

b. Economies of Scale: Bulk production in MTS can lead to cost savings through economies of scale, reducing production costs per unit.

c. Simplified Planning: MTS involves less complex planning and scheduling, as production occurs based on forecasted demand rather than individual orders.

d. Lower Order Fulfillment Variability: With products ready in stock, businesses can better manage demand fluctuations and reduce the risk of stockouts.

What are the disadvantages of Make to Stock (MTS)?

a. Inventory Holding Costs: MTS requires maintaining sufficient inventory levels, leading to increased holding costs.

b. Risk of Obsolescence: MTS carries the risk of inventory becoming obsolete if demand shifts or new product versions are introduced.

c. Limited Customization: Ready-made products in MTS may lack customization options, potentially limiting appeal to customers seeking unique items.

d. Overproduction Risk: If demand does not meet forecasts, MTS can lead to excess inventory and potential waste.

FAQ on MTO and MTS

Which industries benefit most from the MTO strategy?

Industries that offer customizable or highly specialized products, such as luxury goods, furniture, and custom-made electronics, benefit most from the MTO strategy.

How can businesses overcome the longer lead times in MTO?

Adopting efficient production processes, optimizing supply chain logistics, and establishing strong supplier relationships can help businesses mitigate longer lead times in MTO.

What factors influence the success of MTS implementation?

Accurate demand forecasting, responsive supply chain management, and strategic inventory management are critical factors for the successful implementation of MTS.

Can businesses combine MTO and MTS strategies?

Yes, businesses can adopt a hybrid approach by offering a mix of customized MTO products and ready-made MTS products to cater to different customer preferences.

How can businesses manage inventory effectively in MTS?

Implementing inventory management systems, adopting Just-In-Time principles, and regularly reviewing demand patterns can help businesses manage inventory effectively in MTS.

Both Make to Order (MTO) and Make to Stock (MTS) strategies offer unique benefits and challenges to businesses. MTO excels in providing customization and reducing inventory costs, while MTS offers shorter lead times and economies of scale. The choice between MTO and MTS depends on the nature of the products, customer preferences, and business goals. By understanding the advantages and disadvantages of each strategy, businesses can make informed decisions to optimize their production processes and enhance customer satisfaction.