How do you manage your operations to most efficiently supply products to your customer? The product-customer interface typically follows one of two patterns: make to stock or make to order.
Make-to-stock
In a make-to-stock (MTS) process, you produce products and place them in a finished goods inventory (FGI) until you receive a customer order. Most consumer goods manufacturers use this process. MTS works best in environments where customers want their product on demand or where the time it takes to produce the product (the lead time) is greater than the time the customer is willing to wait.
In an MTS process, the firm must forecast what it believes customer demand will be. The company produces a certain volume of product based on the demand forecast. Ready-to-sell products wait in an FGI for the customer to buy.
You can probably appreciate the benefits of MTS. Think of a grocery store shelf. When you need milk, the last thing you want to do is go to the grocery store and find out that you need to order the milk and wait for Farmer Joe to milk the cow. Often, long lead times necessitate making products to a forecast.
One downfall of the MTS process is that you have limited ability to make customized products and, if your product has a limited shelf life such as fresh fruits and vegetables, you run the risk of spoilage. In the case of consumer electronics, you run the risk of obsolete inventory.
The MTS manufacturer must decide what to produce, often well before customer demand is known, because of long production lead times. You can use certain techniques to reduce lead times and increase your ability to make customized products.
Make-to-order
A make-to-order (MTO) process can be your best dream or your worst nightmare. In an MTO process, you only produce something when you have a customer order. MTO allows you to avoid all the risk associated with a bad forecast and to avoid being left holding FGI that no one wants to buy. You can provide a customized product — exactly what the customer wants.
However, you must produce these products within a lead time acceptable to the customer. If you can’t deliver, the customer may cancel the order and/or never return to your company for future orders.
A variation of MTO is assemble to order (ATO). The postponement strategy used to minimize inventory is an example of ATO. In an ATO strategy, assembly of the final product is delayed as long as possible. This allows a firm to wait until a customer order is received but reduces the lead time because some of the process is already completed.
MTO only works if you have a good handle on what your actual lead times are and if you know the customer expectations. In most cases, you give the customer a target delivery date for the product. If you miss this date, you risk alienating your customer and hurting your company’s reputation. MTO requires a well-oiled production process because you have no stock of inventory to hide any mistakes.
Many service processes can only operate using MTO. For example, you can’t process a mortgage loan application until a customer requests a loan. You can’t have an FGI of approved loan applications waiting for the customer.
Choose a method that works
Fortunately, most companies can be successful using either the MTS or the MTO process. They just have to design a process to take advantage of the positives and be prepared to negate the negatives of each.
Take two competing personal computer (PC) manufacturers. One utilizes MTS, while the other emerged in the market utilizing MTO. Both experienced success in the PC computer revolution.
The first company remained with the traditional model of MTS. It manufactured a few models of computers and sold them through major retailers. By utilizing a superior forecasting model, it was able to supply its sales outlets with the products customers were demanding. It designed its production process to mass-produce the models and took advantage of commonality and postponement to minimize inventory.
The competitor introduced an MTO process, producing a computer only when it received an order. This company could customize computers 100 percent. It was only able to accomplish this because of outstanding knowledge of its production lead times and an efficient computer making process. The company used such techniques as implementing a batch size of 1 and developing a responsive supply chain that could respond to unpredictable customer demand.
In addition, the MTO strategy only worked because of the modularity of the components that make up a computer. Modularity, or the ability to swap one component for another, allowed the manufacturer to use different components, such as the hard drive in the same interface, so hard drives of different sizes could be easily popped in during assembly.
The market had room for both strategies. The two different strategies were possible because the target customer for each company was slightly different. MTS customers wanted a computer that met their basic requirements; they didn’t care about what was under the hood. They also wanted technical assistance and/or home installation.
The MTO company appealed to more sophisticated buyers who understood the differences in RAM space and computer chip speed and wanted an ability to customize what they thought was the ultimate machine. In addition, they needed limited customer support and didn’t mind waiting a few days to receive their computer.
Any production strategy can work if you integrate product design, process design, and intimate knowledge of customer expectations and requirements at a competitive price point.