Production to Order and Production to Stock
MTO (Make to Order) is a manufacturing process in which manufacturing starts only after a customer’s order is received. Forms of MTO vary, for example, an assembly process starts when demand actually occurs or manufacturing starts with development planning.
Manufacturing after receiving customer’s orders means to start a pull-type supply chain operation because manufacturing is performed when demand is confirmed, i.e. being pulled by demand. The opposite business model is to manufacture products for stock MTS (Make to Stock), which is push-type production. There are also BTO (Build to Order) and ATO (Assemble To Order) in which assembly starts according to demand.
There are various models for Make To Order. For example, in some cases, the process of assembling prepared parts starts when actual demand occurs. Or, in other cases, the production process starts with the obtaining of materials and parts, or further back from development designing (engineering).
Assembling after receiving a customer’s orders is “ATO (Assemble To Order)” and starting with development designing is “ETO (Engineer To Order)”. Construction by general contractors and plant construction by engineering companies are categorized as ETO.
Pull-type production, such as MTO, BTO, ATO, and ETO, is a business model of the assembly industry in which the quantity to produce per product specification is one or only a few. For example, construction, plant construction, aircraft, vessels, bridges, and so on. From the viewpoint of supply chain management, it has been proven that those who can satisfy due dates promised with customers and can shorten lead times will have an competitive advantage. Even if the production quantity increases, if push-type products that are manufactured by MTS can be manufactured by pull-type production such as MTO and ATO models using SCM software or information technology, then there will be greater business opportunities.
Production to Stock
In MTS (Make to Stock), products are manufactured based on demand forecasts. Since accuracy of the forecasts will prevent excess inventory and opportunity loss due to stockout, the issue here is how to forecast demands accurately.
MTS (Make to Stock) literally means to manufacture products for stock based on demand forecasts, which can be regarded as push-type production. MTS has been required to prevent opportunity loss due to stockout and minimize excess inventory using accurate forecasts. In the industrialized society of mass production and mass marketing, this forecast mass production urged standardization and efficient business management such as cost reduction.
As an economy expands, the income of consumers increases and so demand also continuously increases. Demand changes according to the boom and bust cycle of the economy. Even if demand decreases and inventory increases, inventory will turn into cash one day when demand recovers. Therefore, the main theme of business management is how to predict the future based on the demand fluctuation cycle of the past. In specific, the development of a production/inventory management system is needed to improve management efficiency by, for example, setting safety stock, optimal production, and ordering points based on lead times of material procurement, production, and delivery as well as demand forecasts.
If demand can be accurately forecasted to some extent then there is no problem in creating a forecast production schedule. If MTO (Make To Order) is like an elevator because MTO starts by receiving an order as an elevator starts by pressing a button, MTS (Make to Stock) is like a train schedule (supply schedule) for which the number of passengers (forecast demand) for each time period can be prospected from the past data. Most of daily necessities such as processed foods, sundries, and textiles are MTS-type products and quick response to consumers’ needs (i.e. filling retailer’s inventory) will minimize opportunity loss.
One issue of MTS is to handle supply management so as not to have excess inventory. Therefore, small-batch supply should be frequently performed by pull-type demand such as QR (quick response), ECR (efficient consumer response), CRP (continuous replenishment program), and VMI (vendor managed inventory). By doing so, product flow will accelerate and cash flow will increase. Changing push-type MTS to pull-type supply chain models such as CRP and VMI is the key to successful supply chain management.