Make to Order vs Make to Stock: A Comparative Study

In today’s dynamic business landscape, manufacturing companies face the challenge of meeting customer demand efficiently while optimizing their operational processes. Two common manufacturing approaches that address this challenge are Make to Order (MTO) and Make to Stock (MTS). These strategies represent contrasting philosophies in production and inventory management. In this article, we explore the concepts of MTO and MTS, highlighting their key characteristics and examining the advantages and disadvantages they offer to businesses.

What is Make-to-Order?

Make to Order (MTO) is a manufacturing strategy that focuses on producing goods based on individual customer orders, as opposed to pre-producing items for inventory. This approach allows businesses to offer customized products that meet the unique requirements of each customer. With MTO, customization plays a crucial role, allowing businesses to tailor products to meet unique designs, features, or functionality requested by customers.

This customer-centric approach follows a just-in-time production method. Also, ensuring products are manufactured and delivered within a short timeframe, optimizing resources, and minimizing excess inventory. MTO offers flexibility and adaptability, enabling businesses to swiftly respond to changing customer demands and market trends. However, it’s important to note that MTO typically has longer lead times compared to Make to Stock (MTS), as production starts after receiving customer orders. Nonetheless, MTO helps businesses control costs by avoiding large-scale production and excess inventory, mitigating the risk of inventory obsolescence

Advantages of the MTO

1. Customization: MTO allows businesses to tailor products to meet individual customer requirements. This level of customization enhances customer satisfaction and helps companies differentiate themselves in the market.
2. Reduced Inventory Costs: Unlike MTS, MTO minimizes the need for stockpiling inventory. By producing only what is needed, businesses can reduce carrying costs and optimize their inventory management.
3. Demand-Driven Production: MTO enables businesses to respond directly to customer demand. This approach minimizes the risk of overproduction and ensures that resources are allocated efficiently based on actual orders

What is Make-to-Stock?

Make to Stock (MTS) is a manufacturing approach where products are produced in advance and stocked in inventory based on sales forecasts and anticipated demand, without specific customer orders.
With MTS, standardized products are produced, catering to the general needs and preferences of a broader customer base. This approach allows for efficient production planning, as manufacturers can optimize resources, streamline processes, and benefit from economies of scale. MTS offers shorter lead times for customers. As products are already manufactured and stocked, ready for immediate delivery upon order placement. By manufacturing in larger quantities, businesses can achieve cost savings through economies of scale, lower production costs, and reduced setup time. Also, enhancing cost-effectiveness and profitability

Advantages of MTS

1. Shorter Lead Times: With MTS, businesses keep inventory ready for immediate delivery. This enables them to respond quickly to customer orders, resulting in shorter lead times and improved customer satisfaction.
2. Economies of Scale: MTS allows businesses to leverage bulk production, leading to cost advantages through volume discounts and efficient production processes. This approach is particularly beneficial when demand is relatively stable and predictable.
3. Better Forecasting Accuracy: MTS relies on forecasting demand based on historical data. With accurate demand forecasting, businesses can optimize inventory management, and production planning, and ensure a sufficient stock level to meet customer needs.

Make-to-Order vs Make-to-Stock

Make to Order (MTO) vs Make to Stock (MTS) are two contrasting approaches in manufacturing, each with its own advantages and considerations. MTO allows for product customization, reduced inventory costs, and demand-driven production. On the other hand, MTS offers shorter lead times, cost-efficient production, and standardized products. Let’s analyze the disadvantages of each approach :

Disadvantages of Make-to-Order

1. Longer Lead Times: With Make-to-Order, production starts only after receiving a customer order. This can result in longer lead times compared to Make-to-Stock (MTS) where products are readily available.
2. Higher Production Costs: Customization takes extra manual labor, which can dramatically increase expenses.
3. Complex Supply Chain Management: Make-to-Order manufacturing typically requires coordination. Managing a complex supply chain with varying requirements for different orders can be challenging and time-consuming.

Prior to adopting a make-to-order strategy, it is crucial for businesses to thoroughly consider these disadvantages while evaluating their unique operational capabilities, market dynamics, and customer requirements.

Disadvantages of Make-to-Stock

1. Inventory Holding Costs: With MTS, businesses produce and stock products in anticipation of customer demand. Maintaining a large inventory incurs costs for storage, handling, and potential obsolescence. High inventory holding costs can tie up capital and impact overall profitability.
2. Risk of Overstocking or Obsolescence: MTS relies on demand forecasts and historical data to determine production quantities. If the demand forecasts are inaccurate or customer preferences change unexpectedly, there is a risk of overproduction and accumulation of excess inventory. Excess inventory ties up working capital and may become obsolete, resulting in financial losses.
3. Limited Customization: MTS products are typically standardized to meet general customer demand. This approach may not provide the same level of customization as Make-to-Order (MTO) manufacturing. Customers seeking highly tailored or specialized products may prefer MTO or look for alternatives, potentially leading to missed sales opportunities.

Before implementing a Make-to-Stock strategy, organizations should carefully consider these drawbacks and examine their unique operational capabilities, market dynamics, and customer preferences.

Real-Life Examples

With the following real-life examples, we highlight the successful adoption of each approach:

1. Make-to-Order (MTO) Examples:
   • Tesla: The electric vehicle manufacturer adopts MTO to allow customers to customize their vehicles and choose specific features during the ordering process.
   • Luxury Furniture Brands: High-end furniture manufacturers often follow MTO to cater to individual customer preferences, offering a wide range of customizable options.
2. Make-to-Stock (MTS) Examples:
   • Fast-Fashion Retailers: Companies like Zara and H&M employ MTS to quickly produce and stock their stores with trendy apparel items based on market demand.
   • Consumer Electronics: Companies producing smartphones or laptops often adopt MTS to meet high demand by manufacturing devices in advance and distributing them to retailers.

Conclusion

In conclusion, this article has delved into the advantages and considerations of Make to Order (MTO) and Make to Stock (MTS) manufacturing approaches. The key points discussed include the customization and reduced inventory costs associated with MTO. As well as the shorter lead times and cost-efficient production of MTS. Finding the right balance between customization, inventory management, and customer responsiveness is crucial for successful manufacturing operations.