Make-to-stock is one of today's most idealized business approaches for every small-scale and large-scale industry. With heavy competitiveness in the market, it has become necessary for every individual brand and company to map out their administrative strategies to drive in customers. The following article explains what is make-to-stock and how it works along with examples, strategies, advantages, and disadvantages.
What Is Make-to-Stock (MTS)?
Businesses often use the make-to-stock (MTS) manufacturing strategy in which products are manufactured in bulk and stored in warehouses in anticipation of future consumer demand. Only a portion of the generated finished goods is placed on the store's shelves for instant customer purchase.
The MTS production method lets customers place orders quickly and receive their desired goods. A push supply chain strategy is essential for putting this into action.
This strategy requires evaluating the anticipated client demand when choosing the ideal time and amount to produce the items. This aids in keeping inventory flowing steadily, allowing businesses to quickly complete requests.
How Does Make-to-Stock Work?
A precise knowledge of customer demand is pivotal in determining the right amount of inventory to be manufactured utilizing the make-to-stock production strategy.
The MTS strategy is intended to assist companies in preparing for both spikes and troughs in demand. Yet, past data is the foundation for making judgments about inventory management and manufacturing when estimating future demand.
If the demand for the product can be correctly predicted, this methodology proves to be an efficient production method. If a company rechecks the data and records of sales from the previous year, it would be able to figure out the approximate chances of reaching a certain goal in marketing in the first half of the year.
Depending on the present market value of the company and the customer base, he can suggest the percentage of finished goods the enterprise needs to stock up in the inventories. This cycle is exactly how make-to-stock works.
The MTS production technique must be used with great caution because even a minor gap from the anticipated demand might cause excess inventory to build up, causing cash flow problems, or a shortage of stock, causing revenue losses. Due to the inability to meet demand, the MTS strategy may also result in lost income possibilities and reduced customer satisfaction. Industries that move swiftly like electronics or computer technology can quickly become obsolete by excess inventory.
The MTS model also necessitates the periodic operational restructuring of businesses, which can be expensive. Companies need to decide whether to absorb these higher costs or pass them to customers to remain competitive.
Examples of Make-to-Stock
If your brand decides to follow the make-to-stock principle, it implies that it is trying to keep its inventory prepared beforehand so that it can meet the customer demand immediately as soon as it receives its orders.
You can consider it to be the main objective of the MTS production method. To do this, a supply of finished goods must be kept on hand. For example, a company can use the MTS technique to maintain a suitable inventory level to meet client needs if it anticipates a spike in demand for its goods over the season.
FMCG comes under MTS as they make products in large batches. These include packaged food, toiletries, beverages, stationery, and more. More examples of MTS are clothes, toys, and electronics.
Make-to-Stock Planning Examples
It is significant for companies to notice several variables with demand forecasting to effectively plan make-to-stock production. This includes manufacturing capacity, labor utilization, raw material inventory, replenishment plans, and present and projected levels of finished goods inventory.
For the make-to-stock planning procedure in a small-scale or large-scale system, you should create an accurate and realistic master production schedule. The schedule considers several variables, including the rough cut capacity figures, intended days of stock coverage, production preferences, the minimum, and maximum reorder quantities, the reorder frequency, and the product shelf life.
Alternative to Make-to-Stock
There might be times when competitive brands from various industries might not find fruitful results by implying the principles of made-to-stock. In such scenarios, production techniques, such as make-to-order (MTO) and assemble-to-order (ATO) are frequently employed as an alternative to the make-to-stock (MTS) strategy. ATO and MTO are both demand-driven production strategies.
However, MTO only produces a finished good after obtaining a verified order from a consumer. On the other hand, ATO, which sits amid MTS and MTO, pre-assembles the fundamental parts but only assembles the finished products after receiving a valid order.
Advantages of Make-to-Stock
We have listed the key advantages of make-to-stock in this section -
Avoid Stockouts:
The first and foremost advantage of using a make-to-stock strategy is the overall reduction in raw materials and finished goods stockouts. Last-minute resource unavailability and depletion is are common factors faced by a majority of businesses these days. However, by using the make-to-stock method, such issues can be easily tackled without any hindrance, because goods are produced in advance, allowing sufficient buffer time.
Reduced Cost of Production:
The average cost of production per unit is decreased by large-scale production because fixed manufacturing costs are evenly distributed over many units. Based on the key economic parameters of the company, you can easily distribute the costs with MTS, for reducing the overall expenses in your company.
Arrangements of Production:
When a make-to-stock strategy is used by a business, it can start deciding on the production quantity at a much sooner date than it could be anticipated. Moreover, the scheduling of the work can also be smoothly progressed due to the arrangements made through make-to-stock planning.
Faster Delivery of Products:
One of the best benefits of using the make-to-stock strategy in your business is the fastest delivery of finished goods to the desired location. For make-to-stock's working principle and inventory management, the finished products generally reside on the inventory shelves, all set for shipment. Hence, the moment the firm receives orders from the customers, they can readily set out the products for delivery purposes, which develops a secure corner for the firm in the customers' hearts.
Disadvantages of Make-to-Stock
Heavily Dependent on Predictions:
Some companies rely completely on the forecast by their team about consumer demand in a broader aspect. However, this forecast may not turn out to be true. The firm might even suffer heavy losses for wrong predictions.
A company's sales could be heavily affected due to an external factor like an economic recession, which could even make the businesses go bankrupt due to not generating enough cash through sales. On the other hand, the sales could even start rising unexpectedly at a time when the forecast made by the company was supposed to be low.
Shortage in Inventory Level:
Even if your company can make the most accurate of predictions regarding inventory levels, there would still be some chance of that forecast failing at a crucial stage. If such a thing does happen, then there could be a major shortage or overstocking of inventory which would not be financially beneficial for the business.
Dynamic Consumer Preferences:
Every business out there makes crucial decisions regarding its inventory after looking at the expected demand for certain commodities in the market. However, due to frequent fluctuations in the preference of customers, the trend charts keep on changing. This causes uncertainties due to inaccurate forecasts when it comes to making-to-stock strategy.
Make-to-Stock vs. Make-to-Order
While the make-to-stock strategy manufactures stock in advance and keeps it ready in the warehouse for sale, the make-to-order (MTO) method only produces items after receiving a customer's request that meets the client's needs. Unlike made-to-stock (MTS), MTO exempts companies from keeping a stock of goods readily available for purchase. However, getting the right supply to customize the orders might take some time and delay the delivery process.
Due to the continually shifting consumer preferences and increasing technology improvements, the make-to-stock method can result in unsold inventory, and wastage if production is done in excess. However, if production is carried out after careful market research of consumer demand, MTS proves profitable by making goods available to customers readily when they place an order.
On the other hand, the make-to-order strategy is considered to be quite fruitful for those companies who do not want to hold a huge inventory of products. As a result, businesses in specialized areas like construction have switched to the MTO method to address these problems. Considering the above facts on make-to-stock vs. make-to-order, you can determine the right, strategic choice.
Based on your decision, you can maintain your inventory on a cloud-based platform like TranZact to streamline inventory and production operations!
FAQs
1. What are MTS and MTO?
The Make-to-Stock (MTS) model requires businesses to have an inventory of excess finished goods that can be delivered to customers right away after they place orders. The Made-to-Order (MTO) business model, is when businesses don't keep an inventory system. Instead, they only produce items in response to consumer demand to avoid unnecessary inventory resulting in losses. The upkeep of inventory is thus the primary distinction between the two strategies.
