Make to order and make to stock are two inventory processes most commonly used in manufacturing facilities. Both processes are designed to help fulfill inventory needs and optimize the supply chain.
Understanding the key differences and pros and cons of make to order and make to stock can help your business choose the best option. In this article, we’ll discuss what make to order and make to stock look like in real-world situations, and give you a clear understanding of each.
Make to order in a process where the manufacturer begins production as an order is placed. MTO is also called pull-type manufacturing, since inventory is “pulled” by customer demand.
Make to stock example: Company A orders 10,000 copper fittings from a manufacturer. The manufacturer will begin producing the fittings when they’re ordered. Once the parts are made, they’re shipped to the customer and the transaction is completed.
There is also assembly to order, which is similar to MTO. This process involves partially manufacturing parts, while leaving some room for specific customization. This can reduce manufacturing costs and time while allowing room for changes.
One of the primary benefits of the make to order process is that it leaves room for design changes and customization. The manufacturer can give the customer exactly what they need. Make to order also eliminates making extra parts that need to be sold at a discount or scrapped due to design changes. Make to order minimizes waste and avoids storing excess inventory, which can be very expensive.
Since orders aren’t processed until the order is made, you can expect longer production times. Make to order does avoid inventory carrying costs, but overall it tends to be the more expensive option due to increased setup costs.
Make to stock is an inventory management process where manufacturers have inventory ready to ship based on expected customer needs. The manufacturer will have extra inventory produced and ready to ship before the customer needs it. MTO is referred to as a push-type manufacturing since the inventory is pushed to customers as it’s ordered.
Make to stock example: Company A estimates that they’ll need 10,000 copper fittings every month. The manufacturer will keep 20,000-30,000 fittings on-hand. Every month, the customer will confirm their order and the parts can be shipped immediately.
The primary benefit of make to stock is the instant availability of parts. Since the manufacturer has parts on hand before the customer needs them, the wait time is reduced. We’ve all experienced the frustration of ordering something and waiting months for it to show up. Make to stock can also help lower production costs since the manufacturer can prepare for orders beforehand and optimize their resources.
For example, a machine shop can produce enough parts for 5 or 10 orders and avoid the setup time and costs. A make to order process might require a new setup for each order.
A drawback of make to stock is the fact that it’s based on future estimates. Some customers can’t know exactly how many parts they’ll need next month. Make to stock can also lead to wasted resources if a design changes or parts that have been made are no longer needed. Changing customer needs can lead to holding too much inventory or not having enough inventory.
In short, make to order is based on the customer’s actual needs. While make to stock is based on estimated needs.
Make to order is the best option when you’re unsure of your needs, or need advanced customization options. This is often used when fewer parts are ordered more sporadically.
Make to stock is a better inventory process when customer needs can be estimated within reason. This process is also ideal when fewer customization or order frequency changes are expected.
Spex uses make to stock inventory management for most of our customers. This allows us to reduce order wait times and optimize manufacturing costs.
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