Production strategies play a critical role in your ability to fulfill customer demands on time while minimizing waste. Using the right production strategy for your products helps you optimize your inventory performance and positively affects your cash flow.
Determining the optimal production strategy to use for your products is an exact science – one that needs inputs from your sales and production teams. Ideally, your sales and production teams must be on the same page to determine which production strategy will work best for a given product. In the end, every business strives to have the right products at the right place at the right time. In this article, we’ll explore some of the most common production strategies.
Choosing the right production strategy
Make To Stock (MTS)
Make To Stock or MTS is the most commonly used strategy for standard products without any scope for customization. This strategy works best for products with steady consumption and is relatively easier to predict future demand. In essence, making to stock implies that you are producing or stocking items in advance of actual demand. Although MTS comes with the advantage of lower lead times, businesses can end up carrying too much or too little stock if they cannot predict future demand with some degree of certainty.
Limitations of MTS
Make to stock relies on accurate forecasting of demand for replenishments. If the forecasts are off, it may lead to understocking, and you would lose out on sales. On the other extreme, it may lead to overstocking, which can impact your cash flow.
Make To Order (MTO)
Make To Order is a production strategy that relies solely on confirmed orders to drive production or procurement. It works best for products that have a clearly defined specification and absolutely no forecasts. Unlike MTS, with MTO, you only start production or procurement activities after a customer orders the product. Since there is no free stock for MTO items, your sales team needs to know the lead time to replenish or produce the product.
Limitations of MTO
The unpredictability of orders for MTO products makes it difficult for manufacturers to plan and manage the production and procurement workflow. Unavailability of raw materials and procurement delays can lead to production delays that ultimately impact customer lead time. Manufacturers must automate as much of the workflow as possible to minimize lead times and deliver products on time.
Assemble To Order (ATO)
Assemble to Order is a blend of MTS and MTO strategies. With ATO, the components of the product are stocked ahead of time but wait for orders before final assembly. The ATO strategy is comparatively cost-effective and aims to minimize the risks of production delays. However, to minimize the risks of understocking or overstocking, you must still have reliable forecasting for the components used in the final product.
Limitations of ATO
The effectiveness of ATO depends on the efficiency of the assembly processes. The ATO strategy also faces more or less the same reliability issues as MTS as it relies on forecasting at the components level. Getting your forecasts wrong by a small margin may lead to oversupply or undersupply of components, resulting in wastage or inability to satisfy orders.
Conclusion
Regardless of the production strategy you choose, they all rely on good inventory management, agile production planning, and execution. The production and procurement strategy directly impacts how efficiently you can fulfill customer demands and, ultimately, your profitability. At AccelGrid, we offer powerful inventory management and MRP solutions that support multiple procurement strategies, including MTO, MTS, and ATO. Book a free demo with us to know more about our services.
