What Are Manufacturing Production Strategies?
How you make your products is just as important as what you make. Your production strategy dictates everything from inventory levels and lead times to customer satisfaction and profitability. For most manufacturers, the choice boils down to two core models: Make-to-Stock (MTS) and Make-to-Order (MTO).
Choosing the right approach—or a hybrid of the two—is a critical decision that impacts your entire operation. This post will break down the differences between MTS and MTO, explore their respective pros and cons, touch on common hybrid models, and explain the crucial role an ERP system plays in successfully executing any of these strategies.
Understanding Make-to-Stock (MTS)
Make-to-Stock (MTS) is a traditional production strategy where goods are manufactured in anticipation of customer demand. Production planning is driven by sales forecasts and historical data, with the goal of maintaining a sufficient level of finished goods inventory to meet orders as they arrive. Think of it as a "push" system: you produce goods and push them into the market.
Pros of MTS
- Fast Fulfillment: With products already on the shelf, you can ship orders almost immediately, leading to short customer lead times and high satisfaction.
- Economies of Scale: Producing in large, standardized batches allows for optimized production schedules and lower per-unit costs.
- Stable Production: MTS allows for a smooth and predictable production schedule, making resource and capacity planning more straightforward.
Cons of MTS
- Forecast Inaccuracy: The entire strategy hinges on accurate demand forecasting. A poor forecast can lead to costly overstocking (excess inventory) or stockouts (lost sales).
- High Inventory Costs: Storing finished goods ties up working capital and incurs significant carrying costs, including warehousing, insurance, and the risk of obsolescence or damage.
- Lack of Customization: MTS is designed for standardized products. It offers little to no flexibility for customer-specific configurations.
Best for...
MTS is ideal for businesses that produce high-volume, low-variety products with stable and predictable demand, such as consumer packaged goods, basic electronics, and commodity items.
Understanding Make-to-Order (MTO)
Make-to-Order (MTO), also known as Build-to-Order, is a production strategy where manufacturing begins only after a confirmed customer order is received. This is a "pull" system where actual demand pulls production through the facility. It's built for customization and lean inventory.
Pros of MTO
- High Customization: The primary advantage of MTO is the ability to offer products tailored to exact customer specifications, which can increase customer satisfaction and loyalty.
- Reduced Inventory Risk: With little to no finished goods inventory, the risks of overproduction, obsolescence, and high storage costs are drastically minimized.
- Minimized Waste: Production is directly tied to sales, ensuring resources are only used for products that have already been sold, which promotes efficiency and sustainability.
Cons of MTO
- Longer Lead Times: Since production doesn't start until an order is placed, customers must wait longer to receive their products.
- Irregular Production Flow: Demand can be unpredictable, leading to periods of intense activity followed by lulls, which makes capacity planning more complex.
- Higher Unit Costs: Smaller, customized production runs don't benefit from economies of scale, and setup costs can be higher, often resulting in a higher price for the customer.
Best for...
MTO is suited for companies that produce highly configured, specialized, or high-cost items, such as custom machinery, specialty vehicles, aircraft, and high-end server configurations.
Don't Forget the Hybrids: ATO and ETO
Many businesses don't fit neatly into a pure MTS or MTO model. They often use hybrid strategies that blend the benefits of both.
Assemble-to-Order (ATO)
ATO is a middle-ground approach where key components and sub-assemblies are produced in an MTS-style, but the final product is only assembled after a customer order is received. This allows for a degree of customization while keeping lead times shorter than a full MTO process. A classic example is a computer manufacturer like Dell, which stocks components like processors and hard drives but assembles the final PC to a customer's specific configuration.
Engineer-to-Order (ETO)
ETO takes customization a step further than MTO. In this model, the product is not only built but also custom-designed and engineered from scratch after an order is placed. This process involves close collaboration between the customer and the manufacturer's engineering team. ETO is common in industries like aerospace, defense, and complex industrial equipment manufacturing where each product is unique.
How an ERP Supports Your Chosen Manufacturing Strategy
Regardless of which strategy you choose, a modern Enterprise Resource Planning (ERP) system is the operational backbone required to execute it effectively. An ERP integrates all facets of your operation into a single source of truth, providing the visibility and control needed to manage production, inventory, and sales seamlessly.
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For Make-to-Stock (MTS): An ERP with strong demand forecasting, Material Requirements Planning (MRP), and inventory management capabilities is essential. The system uses historical sales data and market trends to generate accurate forecasts, which then drive the master production schedule. It ensures you have the right amount of stock in the right place without tying up unnecessary capital.
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For Make-to-Order (MTO): For MTO manufacturers, an ERP must tightly integrate sales orders with production and procurement. When an order is placed, the ERP automatically generates work orders and purchase orders for the necessary materials. Features like robust Bill of Materials (BOM) management, job costing, and real-time production scheduling are critical for managing custom jobs profitably and delivering on time.
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For Hybrid Models: A flexible ERP can manage multiple strategies simultaneously. It can handle the MTS components for an ATO model while managing the final assembly as an MTO job. For ETO, an ERP with strong project management capabilities is needed to track the complex design, procurement, and production phases tied to a single customer project.
Choosing the right production strategy is a foundational decision for any manufacturer. By understanding the trade-offs between speed, cost, and customization, you can align your operations with your market's needs. A modern, flexible ERP platform provides the tools to execute that strategy with precision and efficiency.
Ready to see how a cloud ERP can power your manufacturing strategy? Explore our features in the ianaiERP User Guide or contact us to speak with an expert.