Make-to-order versus make-to-stock planning: What makes sense for you?

Whether your manufacturing company currently approaches planning primarily through a make-to-order (MTO) or a make-to-stock (MTS) strategy, it may be beneficial to regularly revisit the question of which strategy to use. After all, new market trends and technological changes occur all the time for most manufactured goods. If your planning strategy remains stagnant, you may miss out on advantages that a different approach may offer. Thankfully, an advanced planning and scheduling (APS) system enables you to make a well-informed choice. Then APS supports that choice with a powerful feature set for make-to-order, make-to-stock, or a host of other strategies.

It could be the case that a less common strategy would be best for your particular circumstances or a particular product type: assemble-to-order, configure-to-order, or engineer-to-order, for example. These lesser known approaches often represent a hybrid of make-to-order and make-to-stock in terms of key considerations: supply, production capacity, and demand. While our focus in this blog is on the two most common strategies, these other strategies may be evaluated using a similar thought process.

Key differences in make-to-order versus make-to-stock planning

The contrast between make-to-order and make-to-stock is summed up in two words: “pull” versus “push.” Make-to-order production is initiated by a customer order – that is, demand – which “pulls” production.  In other words, MTO planning starts with order fulfillment and works backward through the production sequence to arrive at a plan or schedule. Make-to-stock production is initiated at the opposite end of the manufacturing cycle – supply – which “pushes” production. MTS planning starts with raw materials and supplier-provided components and works forward to the finished product.

As the name suggests, make-to-stock planning is designed to create an inventory or “stock” of finished products during one period of time that fulfills orders expected during the next period of time. This means manufacturing operations are completed before the sales orders are received, and planning and scheduling are based on forecasted product demand.

Make-to-order manufacturing operations, on the other hand, are completed after each sales order is received. The production work order is created from the sales order. MTO planning does not rely on stock levels of finished and intermediate products as key process parameters. Instead, it focuses on maintaining production readiness and flow by ensuring efficient and timely replenishment of supply inventories.

What MTO and MTS differences mean to planning and scheduling

These descriptions may have already spurred some ideas about production efficiencies and how MTO and MTS differences affect them. The strengths and weaknesses of each planning process lead to differences in which aspects of production exhibit high efficiency and which aspects require added effort to mitigate low efficiency:

Lead times – Make-to-stock planning effectively reduces production lead time to zero – the product is already made when the order comes in. The only time penalties are those associated with inventory management: locating, shipping and delivering the ordered products from stock. In contrast, make-to-order planning requires special efforts to minimize lead time despite the fact that the production cycle commences only after the order is received. Approaches like demand-driven material requirements planning (DDMRP) are designed to reduce lead times by creating strategic inventory buffers that avert the accumulation of sequential production times for intermediate products.

Customization – Make-to-order planning easily accommodates customized features in a production run. MTO planning is therefore inherently more compatible with the current market trend of “mass customization,” which demands personalized products (and therefore, small lot or batch size) at mass-production prices. It is more difficult to manage customization in make-to-stock planning, but MTS operations may be a good choice for intermediate products under a number of customization scenarios. For example, a beverage may be produced in small batches of reasonably anticipated customizations such as allergen-free varieties; or an electronic device can be made to stock if the customized features occur primarily in the housing.

Inventory levels – Both MTO and MTS planning introduce challenges with respect to optimized inventory levels. With today’s emphasis on lean manufacturing and just-in-time scheduling, make-to-order plans must balance supply inventories with timely delivery of finished products. Overstocked supplies require a large warehouse footprint and may spoil or become obsolete, but shortages of critical supplies may lead to added costs for expedited work orders and production overtime. Overstock and shortages are equally unwelcome costs that may arise with make-to-stock operations, but in this case, the inventories of concern are intermediate and finished products. Overcoming these challenges requires both insightful planning with accurate models and forecasts and agility to modify plans and schedules as real-world conditions change.

How an advanced planning and scheduling system helps

Whether make-to-order, make-to-stock, or another planning strategy makes the most sense for your operations, advanced planning and scheduling systems enable you to maximize production efficiencies and minimize time to delivery. Capabilities of APS software that help optimize planning and scheduling include:

• Rapid generation of achievable, efficient plans and schedules
• Close coordination of the entire supply chain to ensure production steps are executed on schedule
• Optimization tools that can prioritize a variety of criteria (for example, on-time delivery, machine utilization, or changeover frequency)
• Automated assessment of the impact of changes in quantity or delivery date
• Agile reoptimization in response to changing real-world conditions

Siemens customers that have implemented Opcenter Advanced Planning and Scheduling software have achieved significant reductions in inventory levels and waste while improving resource utilization and on-time delivery. We encourage you to explore Opcenter APS today.