Make to Order Vs Make to Stock: What’s Best for Small Manufacturers
You stand before your shelf.
Sat there, mocking you, claiming squatters' rights and refusing to decamp with a customer is a product, one which has overstayed its welcome in your inventory.
Or maybe it’s not just one product, maybe in your zealousness (hey, it’s justified, your products probably rock!) you’ve overestimated its popularity, leaving you with a sight similar to the gif below.
We can help you out!
No, not with your or an employee's forklift driving capabilities, that’s on your end. Maybe more diligence in that area?
However, should your business be make to order? Or make to stock? We can help you decide the best workflow for your operations.
You might be pondering, “How can a change in work-flow help me?” Well, if you do have products stuck in inventory, maybe it’s time to consider a switch from make to stock over to make to order instead, as the latter will (theoretically) leave you with no inventory.
Join us as we uncover the advantages and disadvantages for if you employ one of these lean manufacturing tactics into your business.
Perhaps you’ll discover whilst reading this that your business is more of a hybrid, and depending on circumstances can switch processes for whenever your company needs to evolve to cope with the demand.
Make to order (MTO) and make to stock (MTS) are both implemented by different companies, so please sit back and get ready for the main event: Make to order vs. Make to stock, which is best for small business artisans, crafters and manufacturers.
PRO TIP: Make to Order and make to stock systems determine what happens to items once produced. But, how do you get to the finished product? We have the most comprehensive guide perfect for anyone who manufactures for small businesses.
What is Make to Order?
Quite simply, a make to order definition are products which are manufactured upon a business receiving a customer's order.
If your business is make to order, it means the customers will have to wait for the products, however this allows for more personalization as a customer has a chance to customize their order.
As the business will not start production until receiving the order, this will affect leading times, making it longer. Though, there are ways of combating this by calculating your lead times.
The make to order method belongs to a pull system of manufacturing as it relies on customer orders before starting production. Other methods which fall under this type are build to order (which is another term for make to order), assembly to order and engineer to order.
A Make to Order Example
You want to be the coolest kid on the block, so you decide to become a video gamer. However, you don’t want some generic PC that is being offered by some of the bigger companies.
You’ve researched all the components (processors, RAM, harddrive etc.) and know what you would like in your perfect rig. But you really don’t trust yourself building the computer and handling the hardware.
If you go to a company that builds customized PC’s you will be offered tons of options and variations to build a desktop or laptop that meets your specific needs.
Once you’ve populated a form or talked through your dream PC’s specifications with an employee, you’ll immediately place and pay for your order.
That’s the customers side of the journey finished – well, almost finished. Now they wait for the delivery of their product.
Over at the company, they receive the customer's order and now the manufacturing of that PC will begin on receipt of a manufacturing order.
A well-organized business will have the materials and components on site (or at another location depending on how they store inventory and operate) ready, so that the manufacturing can begin, and not be delayed by low levels of stock.
As mentioned before, make to order products exist under a pull system:
The pull system = Products being pulled to manufacturing from a customer's purchase.
Advantages and Disadvantages of Make to Order
Obviously, the type of business that you run will benefit from a certain type of manufacturing method. However, here are three reasons as to why a make to order operation might be beneficial to your business:
1. Minimize waste
Minimizing waste doesn’t just apply to your business attempting to reduce expenses on material that is being disposed or that is unnecessary to production.
Minimizing waste means that resources are only spent on your product if it benefits your customers. If a process, action or addition to a product does not add value to the customer, it is considered waste.
2. Reduce risk of inefficiency
All manufacturing takes place on receiving the customer's order, meaning the company's operations are directed to just focusing on the manufacturing of products as efficiently as possible.
3. Customizable products
Customers will come to you for when they want a more personalized shopping experience, making your products very unique compared to other companies who MTS.
Unfortunately, there also comes some downsides with being a business which is make to order.
Let's now look at three disadvantages that you can face if you decide to take this approach to manufacturing:
1. Irregular sale demands
Obviously, businesses usually experience peaks or spikes in sales, for example, seasonal increase in sales since it’s the Christmas period.
This means that your business might notice lulls in sales, or even a massive boom in demand, both of which can put major strain on your business.
2. Material stock falling behind
The nature of a make to order business means that your business must always be primed and ready for the next customer order to begin manufacturing as soon as possible.
Although, incorrect stock level readings of materials or a ton of orders can result in your business running out of material at a crucial moment, putting you behind on your orders.
3. Customer wait times
It’s not their fault, and if we’re honest with ourselves, we’re all a little impatient.
Customers want their products and they want them now!
Make to order, once again, giving the nature of the method, means customers have to wait a while before receiving their products. And if they must wait longer than they originally realized, this is going to manifest in their dissatisfaction toward you.
That was a brief overview of the make to order method and how it could potentially benefit your business.
But, now let's look at its counterpart, which is again another avenue of a manufacturing technique that you could explore.
What is Make to Stock?
Make to stock orders are products that are manufactured for inventory, based on sale forecasts and expectations on customer demand.
The idea of this traditional production strategy is to match your businesses production and inventory with customer demand forecasts.
However, this can be tricky and even risky as the slightest miscalculation can mean being left with dead stock, a shortage or an excess of inventory.
If you’re a company who practices make to stock, you should be able to spread production at certain periods to avoid an expected influx in sales.
The make to stock method is a push system of manufacturing as it covers products that are made to forecasted demand.
The push system = Products being pushed to production from expected sales.
A Make to Stock Example
Unlike make to order, make to stock products wait for the customers to come and purchase them.
To keep the examples in a similar field as earlier, you want to buy a PC that will be used as the family desktop. You’re not looking for something fancy, you just want a PC that can get the job done.
You head to an electronics store which sells all sorts of electronical goods, and they stock several PC’s. You look at the different models on display, you pick out one that you like and someone from the store runs behind the scenes and emerges with your product.
The customers journey is finished, but the journey toward creating the final product started long before, in anticipation of the customers arrival.
The business would have analyzed their previous sales and based on different trends (in the current economy and in its own sales history) it will make a forecast based on its own capacity and the amount of demand.
Perhaps, just for an example, the PC was purchased leading up to Christmas, and the company can see a spike in PC sales from the Christmas before and were able to surmise that they will need more stock for the expected rush.
This means the PC the customer bought for their family in December, may have originally been manufactured several months prior, to have increased levels of stock to cope with the Christmas rush.
Advantages and Disadvantages of Make to Stock
As already stated before, this might be a viable method for you depending on your type of business. But we’ll still look at the advantages and disadvantages to get an understanding of if MTS is a strategy that you should be incorporating.
Three advantages are:
1. Spread resources and production
As you’ll be manufacturing your products ready for the customers demand, you can properly and carefully organize your resources and the production which will be carried out to maximize your efficiency.
2. Make to stock scheduling
Using this method means that you’ll be able to design a master production schedule to make sure your workflow is as smooth as can possibly be.
It allows you and your employees to know where they need to be and what is left to do.
3. Minimize customer wait times
Finally, your products will be waiting for your customers – obviously if everything is completed on time.
As soon as your customers have placed their order, their product can be shipped out to them, reducing the customers waiting time by a huge amount.
Using a make to stock method seems like a dream come true for someone who values organization and having complete control of their business's workflow.
The best defense is a strong offence, so to speak.
However, this tactic can also come with some disadvantages as, the most obvious reason, this type of manufacturing process relies heavily on assumption of the industry.
Let’s take a look at three disadvantages which could affect you and your business:
1. Unpredictable nature of consumer trends
You can forecast by analyzing past sales and seasonal spikes, but even though you’ve made completely accurate and correct assumptions, your products unfortunately aren’t selling as well as you originally predicted.
Or the other extreme, there's a sudden boom that you weren’t prepared for. It’s just the nature of the beast.
2. Inventory levels
You can technically be in a perpetual state of either having too much or not enough stock.
3. The difficulty making accurate sales forecasts
The industry can be complex and affected by a ton of variables, so that already makes it difficult to forecast your sales. However, one little mistake or miscalculation means you could end up with too little or an excess of stock, which is going to cost your business.
There are pros and cons to choosing to follow either workflow, however you should know that if you do decide to organize production following one of these tactics, that doesn’t have to be your final choice.
You can experiment and switch between the two, or it might even be beneficial for your business to switch completely over to a different workflow, it all depends on your business's needs.
But, either way, you’re probably realizing that there is a lot of work needing to be done, regardless of the choice. And when it comes down to brass tacks, successful implementation is what's key here.
Organize Your Workflow with Smart Workshop Software
Using a cloud-based inventory management software such as Katana can help you with inventory management and production scheduling from one easy-to-use dashboard, so you can stay focused on crafting your products.
Katana can assist you for if you decide to use a make to order or a make to stock workflow.
If you go to the sell screen within the program you will be able to easily monitor your sale order status’, which is all color coded to make the information more digestible.
From here you can also see when you will need to buy materials, when manufacturing orders are nearing completion and all your new sale orders.
Sales orders can be added either automatically via integration of your eCommerce accounts like Shopify, or applied manually.
From the Order view, you’ll be able to check product availability.
If you’re a make to order business, there exists a make to order option that can be selected, which will then generate a manufacturing order for your business.
Production schedules update automatically and can be adjusted accordingly for if you wish to prioritize a certain production.
Make to stock workflows are used by businesses that manufacture in bulk and carry product inventory. You can access and view items in inventory on the Stock screen. Here it displays materials in stock, your expected stock and material already committed to production – all of these update automatically to represent your businesses most recent activity.
You can also set a reorder point on this page, to make sure that you always have some safety stock in your inventory.
Finally, you can also see your missing or excess stock levels. If a number is highlighted in red, it means that stock is running low and it's time to get more! By selecting the Make option, you can schedule production for the missing stock.
Still Unsure Which Workflow to Use
If you’re still unsure which workflow is best for you, it can be simplified further down to this:
Make to order is a viable strategy when the products you’re manufacturing are complex, with lots of customizable features for your customers.
Make to stock is a viable strategy when there isn’t much variation between the products that you manufacture.
Both workflows come with their own risks, but a good rule of thumb to follow in deciding your method is by the complexity of your product and the demand for your product.
It’s not unusually for a make to order business to have some safety stock in inventory.
Regardless of your choice, the integration of a quality smart workshop software will relieve a ton of stress and help you not get overwhelmed with the manual micro-management of your inventory's movements.
Why not give Katana a try? We offer 14 days free trail and you don’t need to provide us with any card details to give it a test drive.