The difference between Make-to-order Production and Make-to-stock Production

Understanding Production Methods

When it comes to manufacturing products, companies have several methods to choose from.
Two of the most common methods are make-to-order (MTO) production and make-to-stock (MTS) production.
Understanding the differences between these methods can help businesses decide which is best for their needs.

What Is Make-to-Order Production?

Make-to-order (MTO) production, also known as built-to-order, is a process where products are manufactured once a customer places an order.
This approach ensures that the product is customized to the customer’s specifications.

The Process

In make-to-order production, the company waits until an order is received before starting any manufacturing work.
This means that raw materials and components are kept in stock, but the actual product isn’t created until there’s a demand for it.
The production process begins only after the customer’s specific requirements are understood.

Advantages of Make-to-Order Production

– **Customization**: Since products are made only after orders are placed, it’s easier to meet specific customer needs.
– **Reduced Inventory Costs**: There’s no need to store finished products, which can lead to significant savings on storage and inventory management.
– **Less Waste**: Since products are made to exact specifications, less material goes to waste.

Disadvantages of Make-to-Order Production

– **Longer Lead Times**: Because the product isn’t made until the order is received, it can take longer to deliver to the customer.
– **Complex Operations**: Managing individual orders can become complex and require meticulous planning.
– **Scaling Challenges**: Customizing each product can be challenging when the order volume is high.

What Is Make-to-Stock Production?

Make-to-stock (MTS) production, also known as build-to-stock, involves producing goods based on demand forecasts and keeping them in inventory until a customer makes a purchase.

The Process

In make-to-stock production, companies use sales forecasts to predict the demand for their products.
They then manufacture those products in advance and stock them.
When customers place an order, the product is shipped from the inventory.

Advantages of Make-to-Stock Production

– **Faster Delivery Times**: Since products are already manufactured and stored in inventory, they can be delivered to customers quickly.
– **Economies of Scale**: Producing large quantities at once can lead to reduced manufacturing costs.
– **Simplified Operations**: Managing production in batches based on forecasts is generally simpler than handling individual custom orders.

Disadvantages of Make-to-Stock Production

– **Inventory Costs**: Storing large quantities of finished products requires significant investment in warehouses and inventory management systems.
– **Risk of Obsolescence**: If demand forecasts are incorrect, there’s a risk of overproduction, leading to excess inventory that might not sell.
– **Limited Customization**: Products are standardized, which means limited scope for customization as per individual customer needs.

Choosing the Right Production Method

Selecting between make-to-order and make-to-stock production depends on various factors, including market demand, the nature of the product, and customer expectations.

Market Demand

If customer demand is highly unpredictable, make-to-order production might be more suitable as it reduces the risk of excess inventory.
Conversely, if demand is relatively stable and predictable, make-to-stock production can help meet customer needs quickly.

Nature of the Product

For highly customizable or specialized products, make-to-order production is typically the better choice.
For standard products that do not require significant customization, make-to-stock production can be more efficient.

Customer Expectations

If customers expect swift delivery times, make-to-stock production can fulfill these expectations better.
However, if customers value personalization over speed, make-to-order production will likely provide greater satisfaction.

Impact on the Supply Chain

The chosen production method significantly influences the entire supply chain, from procurement to delivery.

Make-to-Order Supply Chain

The make-to-order supply chain focuses on flexibility and responsiveness.
Suppliers need to provide raw materials quickly, and manufacturers must be agile to adapt to various customer specifications.

Make-to-Stock Supply Chain

The make-to-stock supply chain emphasizes efficiency and reliability.
It relies on accurate demand forecasting and strong inventory management to ensure that products are available when needed.

Conclusion

Both make-to-order and make-to-stock production methods have their advantages and disadvantages.
The right choice depends on specific business needs, market conditions, and customer preferences.
By understanding these differences, companies can make more informed decisions and optimize their production processes for better efficiency and customer satisfaction.