Make to stock (MTS) is a traditional production strategy employed by businesses to align inventory with anticipated consumer demand. Rather than setting a production level and then attempting to sell goods, companies using MTS first estimate the potential number of orders for their products and then produce enough stock to meet that forecast.
Key Takeaways
- Definition: MTS is a production strategy designed to match inventory with predicted consumer demand.
- Forecast Importance: Accurate demand forecasting is crucial for determining how much stock to produce via the MTS method.
- Operational Design: Implementing MTS often requires businesses to redesign their operations at specific times instead of maintaining consistent production throughout the year.
- Risks and Drawbacks: Inaccuracies in forecasting can lead to an excess or shortage of inventory, negatively impacting the company's financial performance.
How Make to Stock (MTS) Works
The MTS method relies heavily on accurate demand forecasting to determine how much stock should be produced. When forecasts are based on reliable historical data, the MTS strategy can serve as an efficient production approach. Its principles allow a company to prepare for fluctuations in demand, essentially creating a buffer of stock that can be drawn upon when sales increase.
The Process Involved:
- Data Analysis: Companies analyze past sales data to identify demand patterns.
- Forecasting: They create forecasts for future demand based on these patterns.
- Production Planning: Based on the forecasts, production schedules are designed to meet expected demands.
- Inventory Maintenance: Finished goods are stocked for sale, ready to respond to customer orders.
However, forecasting is inherently tricky, and even slight inaccuracies can result in excess inventory, tying up capital and resources, or conversely, inadequate stock levels that fail to meet market demand. In industries with rapid change, such as electronics manufacturers, surplus inventory can turn obsolete quickly, further compounding losses.
Key Challenges:
- Operational Adjustments: MTS may require businesses to frequently adjust production schedules, which can be costly.
- Economic Variability: Fluctuations in the economy and market trends can further complicate the efficacy of the MTS model, particularly in sectors with seasonal or cyclical sales.
Alternatives to Make to Stock (MTS)
To mitigate the risks associated with MTS, companies may explore alternative production strategies like: - Make to Order (MTO): Production begins only after a customer’s order has been received, eliminating the risks associated with overproduction. - Assemble to Order (ATO): Basic parts are manufactured and assembled into the final product only after an order is placed, giving some of the flexibility of MTO while still keeping some components in inventory.
Overview of Alternatives:
- MTO: Reduces storage costs but may increase lead time for customers.
- ATO: Strikes a balance by having parts readily available while avoiding finished goods that may not be sold.
Example of Make to Stock (MTS)
Manufacturing companies frequently adopt the MTS strategy, particularly in preparation for periods of elevated demand. For instance, prominent retailers like Target witness spikes in sales during the fourth quarter, necessitating that supplying manufacturers ramp up production during the second and third quarters.
Case Study: The LEGO Group - Forecasting Demand: LEGO analyzes past sales data and forecasts a 40% increase in demand for its toys during the fourth quarter. - Production Planning: In response, LEGO scales up production by 40% during the summer months to ensure adequate stock levels in anticipation of holiday season demand. - Adjusting Post-Season: As the peak season concludes, LEGO evaluates further sales forecasts to reduce production in the subsequent first quarter.
If LEGO were to adopt an MTO strategy, it would delay increasing production until orders from retailers like Target justified it. An ATO approach would involve creating the basic LEGO components in advance while completing the packaging only when orders are received, thus sharing the risks of inaccurate forecasting between LEGO and Target.
What Are the Benefits of Make to Stock?
The primary advantage of the make-to-stock production strategy is its capability to preemptively prepare inventory based on anticipated consumer demand, significantly aiding in smooth sales during peak seasons.
Benefits Include:
- Inventory Readiness: Preparedness to meet consumer demands promptly.
- Reduced Lead Times: Customers receive products faster as they don't have to wait for production.
- Cost Benefits: Companies often lower production costs per unit when manufacturing at scale.
What Are the Drawbacks of Make to Stock?
The efficacy of the MTS strategy hinges on the accuracy of demand forecasts. When forecasts prove incorrect, the company can face serious operational challenges.
Drawbacks Include:
- Financial Risks: Excess unsold inventory ties up capital, while stockouts can result in lost sales.
- Inventory Management Complexity: Maintaining the right level of stock can become increasingly complex amidst fluctuating market demands.
Conclusion
Make to stock is a conventional manufacturing method that aligns inventory with forecasted consumer demand. Its efficacy is tightly coupled with a company’s ability to accurately predict future demand. Failure to forecast correctly can lead to being burdened with excess stock or missing potential sales opportunities, ultimately affecting profitability. As such, businesses need to weigh the advantages and disadvantages of MTS compared to alternative strategies based on their specific operational needs and market conditions.
By continuously refining their demand forecasting techniques and adapting to changing market dynamics, companies can leverage the MTS model successfully while minimizing its inherent risks.