Make to Order (MTO) vs Make to Stock (MTS): Which is Right for You?

Make-to-Order, short for MTO, and Make-to-Stock (MTS) are the two common strategies used in manufacturing. Understanding how these two strategies differ from each other can help you make smarter decisions, minimize excess inventory problems and efficiently meet customer demand.

In this post, we will explore what each strategy entails, their pros and cons, and how to decide which one suits your business best.

What is Make-to-Stock Production?

make to order production

Make-to-Stock (MTS) is a production strategy where goods are manufactured in advance, based on forecasted demand, and stored as inventory until sold. This approach ensures products are readily available to meet customer needs, minimizing lead times and improving delivery speed.

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Key Features of Make-to-Stock (MTS)

  1. Forecast-Driven Production: Companies predict future demand to determine how much stock to produce.

  2. Inventory Storage: Finished goods are held in warehouses or stores, waiting to be purchased.

  3. Mass Production: Products are often produced in large quantities to benefit from economies of scale.

Advantages of Make-to-Stock (MTS) Production Strategy

1. Faster Delivery Times

With products already in stock, businesses can fulfill customer orders almost instantly. This reduces lead times and enhances the overall customer experience. MTS is particularly effective in industries where quick delivery is a competitive advantage.

2. Reduced Stockouts

Since products are pre-manufactured, the chances of running out of stock are significantly reduced. This ensures businesses can meet demand consistently, improving customer satisfaction and minimizing lost sales opportunities.

3. Economies of Scale

Producing goods in bulk lowers the per-unit production cost. Businesses can benefit from cost savings on raw materials and production processes, making MTS an economically attractive option for mass-market products.

4. Improved Operational Efficiency

MTS streamlines the production process, as goods are manufactured in standardized batches. This enables businesses to optimize workflows, making production more efficient and predictable.

5. Predictable Cash Flow and Planning

With forecast-driven production, companies can plan their operations and inventory levels more effectively. This predictability allows for better budgeting and cash flow management compared to reactive production strategies.

Disadvantages of Make-to-Stock (MTS) Production Strategy

1. Risk of Overproduction

MTS relies on demand forecasts that are not always accurate. If demand is overestimated, businesses may end up with excess inventory that doesn’t sell, leading to waste and markdowns.

2. High Inventory Holding Costs

Storing pre-manufactured goods requires warehouse space, labor, and insurance, all of which contribute to higher operational costs. Managing large inventories also increases the risk of spoilage or obsolescence.

3. Inflexibility to Demand Changes

MTS systems are less responsive to sudden shifts in customer preferences or market trends. If demand changes unexpectedly, businesses may be stuck with unsold stock that no longer aligns with customer needs.

4. Forecasting Challenges

Accurate forecasting is critical for the success of MTS. However, demand predictions can be affected by various factors like seasonality, market disruptions, or competitor actions, making it hard to strike the right balance between supply and demand.

5. Limited Product Customization

Since MTS focuses on standardized products, it leaves little room for customization. This can be a disadvantage in markets where customers prefer personalized solutions, leading to missed opportunities for businesses that rely heavily on stock production.

Real-World Example Of MTS

Zara, a leader in the fast-fashion industry, uses the make-to-stock method. The brand produces clothing collections ahead of each season and distributes them to stores worldwide. Zara relies on forecasts to anticipate which items will be popular, enabling the company to deliver new collections quickly.

What is Make-to-Order (MTO) Production?

make to order production strategy

Make-to-Order (MTO) is a production strategy where goods are manufactured only after a customer places an order. Unlike Make-to-Stock (MTS), which focuses on mass production in anticipation of demand, MTO ensures that production aligns precisely with actual demand, minimizing waste and inventory costs. This strategy is particularly beneficial in industries where customization and flexibility are essential.

How Make-to-Order Works

  1. Order Placement: Customers place orders, specifying their requirements.

  2. Production Process Initiation: Manufacturing begins only after the customer order is confirmed.

  3. Customized Production: Items are tailored to meet the customer’s specifications (if required).

  4. Delivery to Customer: Once production is complete, the product is shipped directly to the customer.

The Advantages of Make-to-Order (MTO) Production Strategy

1. Reduced Inventory Costs

With MTO, there’s no need to store large quantities of finished goods. This significantly lowers inventory holding costs, such as storage, insurance, and warehousing fees, hence simplifying inventory management.

2. Customization and Personalization

MTO allows companies to produce goods according to customer specifications. This flexibility meets the growing demand for personalized products, giving customers exactly what they want, from design to functionality.

3. Minimized Waste and Overproduction

Because production begins only after an order is placed, businesses avoid the risk of overproduction. This helps reduce waste and ensures that only what is needed is produced. MTO is particularly beneficial in industries where unsold goods could quickly lose value.

4. Demand-Driven Production

MTO aligns production with real-time customer demand, minimizing the risks associated with inaccurate demand forecasting. Businesses are more agile, adjusting production as market trends and customer preferences evolve.

5. Improved Cash Flow Management

Since goods are produced in response to confirmed orders, businesses receive payments sooner in the production cycle. This improves cash flow and reduces the financial risks of tying up capital in unsold inventory.

Disadvantages of Make-to-Order (MTO) Production Strategy

1. Longer Lead Times

Since production begins after the order is placed, customers often face delayed delivery compared to Make-to-Stock (MTS) products. This can negatively impact customer satisfaction, especially for those expecting faster fulfillment.

2. Higher Production Costs

Producing smaller batches or highly customized products often results in higher per-unit costs. Businesses may lose the economies of scale that come with mass production, making it harder to keep prices competitive.

3. Complex Production Planning and Scheduling

MTO requires a flexible production process to handle varying orders and fluctuating demand. Managing multiple unique orders can lead to bottlenecks and inefficiencies, especially if production capacity is limited.

4. Demand Uncertainty and Capacity Constraints

Handling volatile demand can be challenging with MTO. If multiple orders come in simultaneously, production lines can become overloaded, leading to delays. On the flip side, low demand may result in underutilized capacity, impacting operational efficiency.

5. Cash Flow Management Risks

In MTO, businesses typically receive payment after fulfilling orders. This can create cash flow challenges, especially when the production process is lengthy, requiring upfront investment in raw materials and labor.

Real-World Examples of MTO

Brands like Indochino and Hockerty specialize in made-to-order suits and dresses. Customers provide their body measurements and choose from a variety of fabrics and styles. The garments are produced from scratch and shipped directly to the customer, ensuring a perfect fit.

Make to Order vs Make to Stock: Key Differences

1. Production Timing

  • MTO: Production begins only after a customer order is received.

  • MTS: Goods are produced in advance based on forecasted demand and stored until sold.

Key Difference: MTO aligns production with actual demand, while MTS relies on predictions.

2. Inventory Management

  • MTO: No finished goods are kept in stock; only raw materials are stored.

  • MTS: Finished products are stored as inventory until they are sold.

Key Difference: MTS requires warehouse space for storage, while MTO minimizes inventory holding.

3. Lead Time

  • MTO: Longer lead times, as production starts after the order is placed.

  • MTS: Faster delivery times since products are already available in stock.

Key Difference: MTS offers immediate delivery, while MTO may involve delays.

4. Customization Options

  • MTO: Allows for customized or personalized products to meet customer preferences.

  • MTS: Focuses on standardized products for mass-market appeal.

Key Difference: MTO offers flexibility for personalized goods, while MTS emphasizes standardization.

5. Risk of Overstock or Stockouts

  • MTO: Lower risk of overproduction since items are made to order.

  • MTS: Higher risk of overstock if demand forecasts are inaccurate, leading to waste or markdowns.

Key Difference: MTO manufacturing strategy minimizes overproduction, while MTS carries the risk of excess inventory.

Conclusion

Both Make-to-Stock (MTS) and Make-to-Order (MTO) strategies offer unique advantages and are suited for different business models. While MTS emphasizes efficiency and speed, MTO offers customization and waste reduction. A well-thought-out production strategy that aligns with market needs can be the key to operational success. As markets evolve, hybrid models are also gaining traction, allowing businesses to balance speed, flexibility, and cost-efficiency.

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