The difference between Order-based Production and Production System

In the vast world of manufacturing, understanding different production methods is crucial for efficiency and success.
Two commonly discussed methods are order-based production and production systems.
Each method has distinct characteristics and benefits, and choosing the right one can have significant impacts on a company’s operations and profitability.

What is Order-based Production?

Order-based production, also known as make-to-order (MTO), is a strategy where products are manufactured only after a customer places an order.
This approach allows for customized production, catering specifically to customer needs and specifications.
Businesses using this method only start the production process once they receive a confirmed order, meaning they carry little to no inventory of finished goods.

Benefits of Order-based Production

Order-based production offers several advantages that make it an appealing option for many manufacturers.

Cost Efficiency: By producing items only after an order is received, companies can minimize inventory costs.
There’s no need to store large amounts of finished products, which can drastically reduce warehousing expenses.

Customization: This method allows for high levels of customization.
Each product can be tailored to the customer’s specifications, ensuring satisfaction and potentially commanding higher prices.

Reduced Waste: Because production is demand-driven, there’s less risk of overproduction.
This leads to less waste, whether in the form of unsold products or unused materials.

Challenges of Order-based Production

While order-based production has its perks, it also presents some challenges.

Longer Lead Times: Since products are only created after an order is made, lead times can be longer.
Customers may have to wait for their products to be manufactured and delivered, which may not be ideal in industries where speed is crucial.

Unpredictable Workloads: Orders can fluctuate, leading to periods of high demand followed by lulls.
This unpredictability can make it difficult to manage workforce schedules and production planning effectively.

Understanding Production Systems

Production systems, often associated with mass production or make-to-stock (MTS), involve creating products in advance based on forecasted demand.
Manufacturers typically produce large quantities of standardized items and store them as inventory until they are sold.
This system is highly efficient for producing goods that are consistent and in high demand.

Benefits of Production Systems

Production systems come with their own set of advantages that make them suitable for certain types of manufacturing.

Quick Fulfillment: Since products are already manufactured and stored, customer orders can be fulfilled almost immediately.
This is ideal for businesses where quick delivery is a competitive advantage.

Economies of Scale: Mass production allows companies to benefit from economies of scale.
Producing large quantities of the same item can reduce the cost per unit, leading to higher profit margins.

Standardization: This method is highly suited for producing standardized products.
It ensures uniformity and consistency, which is essential for maintaining quality standards.

Challenges of Production Systems

Despite their efficiency, production systems also face several challenges.

Inventory Costs: Maintaining large inventories of finished products can be expensive.
Storage, handling, and potential obsolescence all add up, increasing the overall cost.

Risk of Overproduction: Misjudging demand can lead to overproduction.
Excess inventory may result in waste or require discounts to clear, impacting profitability.

Less Flexibility: Production systems generally offer less flexibility for customization.
Standardized products may not meet the specific needs of some customers, limiting market reach.

Choosing the Right Method

Deciding between order-based production and a production system depends on various factors, including the nature of the product, market demand, and operational capabilities.

Nature of the Product

For highly customized or complex products, order-based production is often the better choice.
This allows manufacturers to meet specific customer requirements without overextending resources.

On the other hand, for products with stable and predictable demand, a production system can be more advantageous.
It enables quick response to orders and benefits from economies of scale.

Market Demand

Understanding market demand is crucial.
For volatile or unpredictable markets, order-based production minimizes the risk associated with fluctuating orders.
Manufacturers can adapt to changes quickly without being burdened by excess inventory.

Conversely, in markets with consistent and high demand, production systems are more efficient.
Companies can produce in bulk and ensure timely delivery, meeting customers’ expectations for speed and reliability.

Operational Capabilities

The choice of production method should also consider the company’s operational capabilities.
Order-based production requires flexible and responsive manufacturing processes.
It might also demand close coordination with supply chain partners to ensure timely delivery of materials.

Production systems, however, need robust planning and forecasting abilities.
Efficient inventory management and storage solutions are also critical to handle large volumes of products.

Combining Both Methods

Some companies find that blending both methods can strike a balance, optimizing the benefits of each while mitigating their drawbacks.
This hybrid approach, sometimes referred to as make-to-assemble (MTA), involves keeping inventories of standard components that can be quickly assembled into customized products upon receiving an order.

For example, a furniture manufacturer might stock standard chair components.
Upon receiving an order, they can quickly assemble and customize the chairs based on the customer’s preferences for color, material, and finish.
This system combines the quick fulfillment of production systems with the customization capabilities of order-based production.

Conclusion

Understanding the differences between order-based production and production systems is essential for making informed manufacturing decisions.
Each method has its unique advantages and challenges, and the best choice often depends on the specific circumstances of the business.

By carefully evaluating product nature, market demand, and operational capabilities, companies can choose the most suitable production strategy.
In some cases, blending both methods might offer the optimal solution, providing flexibility, efficiency, and cost-effectiveness.

Ultimately, the goal is to align the production approach with the business objectives, ensuring that manufacturing operations contribute positively to overall success and customer satisfaction.