Q 611. What is the difference between Make to Order and Make to Stock? Which of the two approaches is better? Provide examples where each of them is deployed.

 

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Businesses utilize two distinct production and inventory management systems, "Make to Order" and "Make to Stock", to meet consumer demand. Both strategies have benefits and drawbacks, and the decision between them is influenced by several variables, such as the product's characteristics, market demand, and organizational capacity.

Make to Order:

Definition: Under the make to order strategy, goods are produced solely upon an order from a client. This indicates that the inventory of finished goods is either very low or nonexistent. Upon receipt of a specific customer order, the production process starts.

Benefits: Decreased chance of surplus inventories and overproduction, decreased carrying and holding expenses for completed items. Extremely adaptable goods that satisfy certain client’s needs and quality retention of the products as the storage time is very less.

Negative aspects: Longer lead times because production begins only once an order is received, Managing erratic demand spikes can be difficult, higher setup expenses because more frequent changeovers are required, suppliers also need to be very lean in their stock inventory and quick to respond to any changes in the product demand.

Manufacturers of bespoke apparel and customized furniture, for instance, usually employ the Make to Order strategy. The production process doesn't begin until after a buyer has placed an order for a certain style of furniture or a custom-made suit, in Automobiles Toyota is a close example of Make to Order as their Vehicle production plan is on Pull system where production starts once the order is placed from customers.

Make to Stock:

Definition: Products are produced and stocked under the make to stock strategy in anticipation of future consumer demand. Production is determined by market trends, past demand patterns, and forecasts.

Benefits: Quicker delivery times because the goods are easily accessible, higher batch sizes lead to manufacturing efficiencies of scale, improved ability to adapt to abrupt increases in demand.

Negative aspects: Danger of having too much inventory if demand is lower than anticipated, keeping expenses incurred by keeping an inventory of finished items, restricted possibilities for product customization, quality of finished products might deteriorate in case demand is less due to high inventory.

Example: The Make to Stock method is commonly used in the production of fast-moving consumer goods (FMCG), such as soft drinks, tinned products, and common household items. Because of the rather steady demand patterns for certain goods, producing them in large quantities and keeping a stockpile is more economical.

Which Method is Superior:

The decision between Make to Stock and Make to Order is influenced by the type of business and the goods it sells. Businesses that provide highly customized or specialized goods, where each customer's needs and tastes are unique, are better suited for the Make to Order model.

Businesses that deal with standardized items and rather steady demand patterns are more suited for Make to Stock. Production economies of scale are possible using this method. A practice known as "Make to Order and Make to Stock" (MTOS) occurs when companies combine the two approaches. By using a hybrid method, the benefits of customization and forecast based production efficiency are intended to be balanced. In the end, the "better" strategy is dependent upon the particulars and goals of the company.

Difference between Make to Order and Make to Stock

 

Which is better?

 

Make to order is better when

 

- Working capital cannot be blocked
- Customization is needed
- Uncertain demand patterns

 

Make to stock is better when

 

- Economies of scale can be achieved
- Stable demand
- Shorter lead time is needed

Examples

 

Make to Order 

 

• Wedding costumes are make to order - it is customized based on requirements from bride and groom
• Aero planes
• Rolls Royce car

 

Make to Stock

 

• iPhone - Apple's iPhone is an example of make to stock. Demand is forecasted based on historic sales of older versions of iPhones / phones with similar configurations 
• FMCG products

Make to Order 

Most commonly referred as Pull manufacturing, no production will start unless you have a Purchase Order(PO) or Sales Order (SO) from customer. You are only producing the part that you actually need and only when it is needed by customer. This is also referred as Just in time(JIT) or Kanban pull system.

 

Advantages

1.      Less or no Inventory.

2.      When you have to customize your Product for every Customer/Order.

3.      Less impacted due to customer design change / Configuration change as you will not have any unusable stock.  

 

Disadvantage

1.      In Manufacturing sector Raw Material(RM) Lead time is high, if you are only going for Pull system. Getting RM, producing part will increase you Lead time, In manufacturing lead times matter a lot.

2.      In sector where demand vary from season to season then in peak season your capacity is not sufficient, in low season you don’t have demand.

 

Example Industries 

1. Small Manufacturing companies

2. Automotive (Luxury Cars customized)

3. Textile (Designer wear)

 

Make to Stock

Most commonly referred as Push manufacturing, company will produce based on demand Forecast, mostly preferred in industries where there will be low chance of unexpected demand fluctuation. Finished good are produced and stored in ware house or showroom and waiting for customer to purchase the product.   

 

Advantages

1.      Economic since goods are bought and produced in bulk.

2.      As on when and how much to produce is in our control can plan based on historic data to take advantage of seasonal sales. (sales of thermals / sweaters / Over coats high in winter)

3.      Quick Response time or lesser lead time as you will have parts / items readily available in stock or ware house.

 

Disadvantages

1.      Forecast is so unpredictable

2.      Inventory levels will be high

3.      Unpredictable customer preferences (size, color, fit, type of cloth)  

4.      High risk of Shortages or excess of items

 

 Example Industries 

1.      Raw material provider (Mil)

2.     Fast moving Consumer Goods (FMCG)

3.     Commercial Of The Self (COTS) items.

4.     Beverages

5.     Pharma

6.     Food items

 

Which of the two approaches is better?

One cannot say a particular system is better, both the systems suit different industries. it varies from industry to industry. A system which is world class in one industry is a loss making system in other industry. Which system suits your industry depends on how you operate and how is the market behavior.

 

In modern days most companies prefer being a Hybrid instead of following a particular system. They implement make to stock at the middle of the process system so can respond to the customer demand and do the customization as needed. There ability to respond to customer order and have products available when customer wants them, without getting struck with piles of inventory which can never be sold.

 

Example:-

1.      Mc Donald’s / KFC :- They maintain stock of bun's, hams, onions ready as they receive the order they make the final customization.

2.      Manufacturing Industries :- They buy Raw material and keep in stock as on when they receive the Order they produce the part and ship to customer.

3.      Textile Industry :- Does production of Fabric in raw form and keep in stock, once receiving order customization of color, size are done and sent to showroom.

4.      Zara Company :- Zara doesn’t work on the number of finished clothes but on the quantity of raw materials needed to manufacture the clothes. This helps to reduce waste, as you can re-use fabric but not resell a piece of clothing that no one wants to buy.

 

Final Summary

The Key difference between push and pull manufacturing is in a push system, company decides how much of the product will reach the market while in a pull system, Customer demand though order dictates how much to produce.

 

Make to Order	Make to Stock
Pull Type manufacturing	Push Type manufacturing
Parts are produced after receiving the PO or Order	Parts are produced based on stock (Min Stock Qty) or Market forecast (based on historic data)
Not depended on assumptions as we have firm PO	Based on Assumptions (Market demand, Forecast)
No Fluctuation as in PO or Sales order Qty is rigid	High fluctuations as Qty is based on unreliable assumptions. Forecast is unpredictable.
Low Inventory	High Inventory
Delivery time High	Delivery Time Low
Cost of final product High	Cost of Final Product relatively low as you are buying and producing in bulk.
Wastage will be less	Wastage can be High
No risk of Shortages or excess	High risk of Shortages or excess

 

Make to Order is one of the business strategy which is based on order confirmed by customer, it signifies unique or specific requirement. It follows Pull-system in the process therefore several advantage are considered like no-inventory risk, efficient use of resources, higher customer satisfaction and minimum wastage

Lets us take an example of MTO in computer-business; Dell is one of the world largest tech company who are expert in supplying of Laptop / Desktop with identical technical specifications to fulfill customer requirements. We see most of the manufacturing units, corporate offices and other business places their order to DELL because of their expertise in providing machines with asked technical configuration within stipulated time.  MTO approach results high customer satisfaction and business repeatability to DELL.

 

Make to Stock is based on demand forecast strategy. As per production workflow process, MTS belongs to the Push system which waits for the buyer to purchase product. There are some of the potential risk in MTS like inventory issue, product expiry date, seasonality, market demand fluctuation.

Once again consider an example of DELL company which produces laptop/Desktop with several configuration while keeping customer requirement & budget in mind ( based on market survey ) and push material stocks to store for sale, this approach is called MTS.

Same company follows MTS and MTO strategy for making the origination profitable and sustainable in business.

product-examples of MTS & MTO:

“FMCG companies' product like Toothpaste, soaps, biscuits are good example of make to stock while Aircrafts, customized cars & machines are for Make to Order”

 

Which of the two approaches is better?

In my opinion, Make to order is better than make to stock because MTO works on Pull approach. There is no inventory, minimum waste and efficient utilization of workforce in comparison of MTS.

Make to order requires expertise to provide personalized product which gives competitive advantage with good profitable business.

Diagram:

 

Adil Khan has given the best answer to the question by highlighting the challenges in each of the approaches and the industries where it suits best.

 

Do read all the answers to get varied examples of organizations where the two techniques are used.