The Reality vs Illusion of Make to Order and Forecasting

Executive Summary

  • Companies, promoted by consultants, continually propose that they would like to move to make to order.
  • What goes unmentioned is that only a tiny percentage of companies can go to make to order.
  • Why assemble to order is confused with make to order.

Introduction to Make to Order Promises

I discuss forecasting with companies as part of both my on-site consulting and occasionally, when I perform phone consultations. This puts me in contact with what a lot of managers and directors of demand planning are thinking. Something which I have found worthy of an article is the fact that many executives tell me that they would eventually like to move from make to stock to make to order environment.

Make to Order Definition or MTO Meaning

Make to order, or sometimes called (MTO) or build to order or built to order (BTO), is one of the major manufacturing environments. The others are:

  • Assemble to order
  • Engineered to order
  • Make to stock

Using this environment, companies will have some sub-assemblies already built, stocked, and ready to assemble based on the customers’ requirements. This approach is also referred to as build to order or built to order (BTO) and focuses primarily on production strategy.

Some of the required components are stocked, whereas more expensive or highly customized parts may need to be produced. Production only starts after an order is received.

MTO Meaning Versus Build to Order or Built to Order

Make-to-Order (MTO, a.k.a. Build to Order): This approach is also referred to as build to order or built to order (BTO) and focuses primarily on production strategy. Some of the required components are stocked, whereas more expensive or highly customized parts may need to be produced. Production only starts after an order is received.

MTO and the Job Shop or JobShop

Regarding the production type, the MTO meaning can be closely connected to the job shop or job shop. The job shop is a manufacturing process that produces small batches. The job shop or job shop would create custom items.

The reason for the naming is that the job shop (plant) moves to a new job, which is a custom job. Hence the term “job shop.”

Job shops were the earliest form of manufacturing. Because job shops are inefficient, the rise of mass production significantly reduced the price and quality of products that were available.

How Common is MTO or Build to Order?

While often claimed, MTO or BTO is quite rare in practice. Only a few industries, like aerospace and construction, actually follow a pure build to order model.

The Motivations of Moving to Make to Order

There are several motivations for companies that desire to move to make to order environment:

  • A desire to seem leading edge
  • A desire to remove the company from the complexities of performing forecasting, or to eliminate bad forecasting.
  • The inability to forecast at a sufficient accuracy drives not only people to think about make to order, but also provides fuel to proponents of Lean. Lean is now a significant trend that influences corporate decision making. There are circumstances where Lean applies; Lean can also be used to justify things that are not feasible. There is no denying the influence of Lean philosophies.

Some of the motivation is to, in essence, find a magic bullet. Any company that could move to make to the stock environment would never have to forecast, never have to keep inventory, and would not have waste in the form of products that are obsolesced before they can be sold. It would also eliminate the need to reposition stock (called redeployment). Sounds great. Whether a company can be successful in make to the stock environment is primarily dependent on the market they are in and the type of product that they sell.

Make to Stock Definition

Make-to-Stock (MTS, a.k.a. Build-to-Stock or Build-to-Forecast): Here, the replenishment is triggered by a forecast. Probably misnamed, MTS should probably have been called make to forecast, as the forecast is the trigger for replenishment – which of course results in stock until the actual sales order arrives.

Make to stock, or sometimes called (MTS) is one of the significant manufacturing environments. The others are

  • Assemble to order
  • Engineered to order
  • Make to order.

Make to stock is the most common in manufacturing environments. While little discussed, make to stock allows for economies of scale in procurement, manufacturing, and distribution, which lowers the unit costs of items.

The Relationship Between the Sales Order and the Replenishment Trigger

All procurement and production are performed before the sales order is received. By contrast, both Engineering-to-Order and Make-to-Order all of the procurement and production are performed after a sales order is received.

And that is with the products in the BOM for Engineering-to-Order being procured and produced the latest after the sales order is received as, at the time of the receipt of the sales order, it is not known precisely what is to be built.

In MTS, the replenishment is triggered on the basis of a forecast.

Where Make to Stock Environments Apply

In markets or submarkets where customization is more important than volume or cost to the consumer, production can be postponed until after the sales order.

In markets or submarkets where costs are more critical, and there is little in the way of benefits of customization for the product make to order is not an option.  A good example being light bulbs, for instance. Here production should be performed before the receipt of the sales order. It should also be observed that multiple manufacturing environments are employed for the same category of products. For instance, one can either buy a dress shirt from Brooks Brothers in a store, which was produced with a make to stock manufacturing environment or can provide one’s measurements to a tailor and have the shirt custom made in a make to order manufacturing environment.

What Goes Unmentioned

What is often unmentioned is whether the company in question exists in an environment where customers are willing to wait for their items to be produced, or if they expect them to be available when they want them. Also, what is often left out of discussions related to make-to-order is the increase in cost and the decrease in quality that necessarily follows. Companies need to be cost-competitive, so the extra costs associated with make to order are not typically going to be acceptable.

The Extra Costs of Make to Order for Make to Stock Environments

  • Increased transportation costs (to get suppliers to the company faster)
  • Increased changeovers on machinery
  • Higher costs of supplies, both in higher ordering costs per item, and higher transportation costs as smaller orders lead to higher per-unit shipping costs.
  • Decreased utilization of factory equipment (as equipment must wait for input material, which may be late or on route when the machine is ready to produce)
  • Rush jobs that can both reduce the quality of the accepted items and produce more finished goods that must be scrapped. This means that more raw material must be purchased for every sellable item.

Considering the Total Costs and Quality Implications

In totality, while moving a make to stock environment to make to order, the company reduces its planning, but increases its costs and reduces its product quality. This is evidence that planning adds value to the overall supply chain process.

Companies may be frustrated with their planning results. Still, when they describe moving to make to order environment, they do not add up all the extra costs and problems that come from producing in this way The quote below describes why to make to order is an unrealistic goal for the vast majority of companies.

Example from Our Book

The following is an excerpt from the book “Demand Planning Methods in Software.”

“However, it is not possible for the vast majority of companies to move to a build-to-order environment. Except for extremely special-ized manufacturing (such as print-on-demand publishing), it’s difficult to come up with examples of products that cost the same amount to produce whether making one or a hundred or a thousand. Similar limitations apply to procurement, as procuring in larger batches is less expensive than procuring in smaller batches. Many people who talk about moving to a make to order environment are essentially fooling themselves.”

What Are They Describing When They Say “Make to Stock?

In fact, in haste to move to make to order environments, companies often use examples of “make to stock” environments that are not make to stock. Forecasting is still necessary. Two examples of environments that are called make to stock are listed below.

Assemble to Order Example 1: Computers

For instance, they may bring up Dell Computer, which is well-known for their online business not building the entire computer, but instead holding components and then building on-demand once an order is received. As long as all the components are in stock, a computer can be assembled quickly.

This is how Dell has stayed away from creating final products, which would mean they would have to guess or forecast as to how many of each configuration would be required. This is not make to stock. I quote again from “Demand Planning Methods in Software.”

“Most environments that people call “make to order” are actually “assemble to order.” Assemble to order still requires a forecast at the subcomponent level. This is why companies must forecast.”

Dell has a type of product where the complexity resides in the components, and the assembly of the components is the easy part. Therefore, they defer the natural part until they receive a firm order.

Assemble to Order Example 2: Books

If we take the example of book production. Some companies are at the point where they can produce one book at a time, This is quite impressive and means that authors and publishers do not have to engage in long production runs, which is particularly important during the early stages of a book’s life when its future demand is tough to predict. This print on demand is only possible at a higher unit price, and at a lower quality. It also has limitations in that at this time color books, or books with colored graphics do not come out very well. Therefore, even with a straightforward item to produce (print pages, bind pages, add cover), building to order has both cost and quality disadvantages.

Secondly, once again, these printing companies do not wait for a book to be purchased and then place an order for paper and ink. They hold vast stocks of the components and are have the flexibility to produce any book that is ordered. Again, this is assembled to order, not make to order.

How Online Shopping Changes Forecasting

Many companies would like to move to make to order environment. Indeed, it simplifies supply chain planning and reduces risks that the company takes in the form of inventories. Few companies can move to this environment. Producing in batches is both cost-effective and easier to maintain quality levels. It also reduces costs in procurement. Finally, in most cases, customers are not willing to wait for the lead time necessary to produce items. Online shopping has introduced a typical lag of shipping. Buying online is providing more opportunities for assemble to order as consumers are becoming accustomed to waiting a few days for their order to arrive by courier, even if the item is stocked. This is a change from the time when people went to stores, expecting to walk out with the item in hand. This may allow companies that sell online to extend the time between ordering and when the product is received, but taking a day or two to assemble the product. Once a consumer is prepared to wait two days for their order, they may be willing to wait a few days longer.

Is this something that can be leveraged at least to move some companies to an assemble to order if not make to order environment.

The rise in online shopping is something that companies should include in their supply chain strategy. It has a strong effect on how forecasting is performed. However, it is not apparent that the move towards online ordering radically changes the strategies that are available to companies. Instead, it provides some extra leeway, which can be used to reduce supply chain costs and to postpone the final assembly depending upon the lead assembly time. 

Background on Online Shopping and Their Supply Chain Implications

If your customers are not willing to wait for your average lead times is either completely impossible or significantly increases the costs to provide the item as well as reducing the quality level of the item. However, if customers can accept a lead time, moving to assemble to order is possible.

Online Shopping and the Changes to the Retail Supply Chain

We are in the middle of significant changes in retailing. Online retailing has tremendous advantages over buying in stores. These include the following:

  1. Far greater selection
  2. More and less biased information. This is, in fact, one of Amazon’s significant assets, its review database. When people shop in stores, there are no product descriptions and no objective reviews in the store. Stores have poor information quality to them. That is, the information about products is both low, and the only sources of information tend to be the biased salespeople in the store.
  3. Convenience (no driving to a store, finding parking, walking around the store)
  4. Speed (of the shopping experience)
  5. The ability to be shown related products (Amazon does this exceptionally well)
  6. Capacity to try out some products (such as read parts of books and listen to music), although the ability to try or test other products is a disadvantage (such as trying on clothes or shoes or driving a car).

The Effect of Amazon on Online Shopping

However, for many years, poor e-commerce websites combined with trust issues, and the resistance that many people had to change their shopping habits, restricted online shopping from being much of overall retail sales. However, that is rapidly changing. Lots of credit must go to Amazon. Amazon set the standard for both web design and customer service that the rest of the online sources were required to emulate. Amazon has been so successful that it has been considered a culprit in the closure of Borders and some Best Buy Stores.

The Tipping Point

I believe that it is soon to reach a tipping point, and will see many physical stores close completely or shrink the number of stores they have. This brings up an essential aspect of the opportunities this presents for product postponement to companies.

How Customers are Being Habituated to Wait for Their Products, Through Online Shopping

Buying online is providing more opportunities for assemble to order as consumers are becoming accustomed to waiting a few days or to accept a lead time for their order to arrive by courier. Even if the item is stocked. This is a change from the time when people went to stores, expecting to walk out with the item in hand. This may allow companies with online shopping to extend the lead time between ordering and when the product is received, but taking a day or two to assemble the product.

Once a consumer is prepared to wait two days for their order, they may be willing to wait a few days longer. However, these are assembled to order opportunities, not make to order opportunities. If some customization is performed on the item (such as monogramming or configuration options), this does not change the fact that this is assembled to order.

Online sales do not increase the market for made to order item much more than what they have always been. However, assemble to order is a real possibility, and this is a move that has substantial impacts on forecasting.

Online Shopping Strategic Assessment

The rise in online shopping is something that companies should include in their supply chain strategy. It is not apparent that the move towards online ordering radically changes the strategies that are available to companies. Instead, it provides some extra leeway, which can be used to reduce supply chain costs and to postpone the final assembly depending upon the lead assembly time. Companies should analyze their assembly period and calculate the costs of expedited shipping.

Once a customer is willing to accept at least some period to receive a third order, and they may be ready to take a little more lead time. It may make sense to cover the costs of expedited shipping to get that extra day to perform the assembly. It is a new sales channel, with different requirements than the physical store model that needs to be evaluated on a company to company basis.

Questions to Ask

  • What is our assembly time, if all the components are in stock?
  • How long can we expect customers to wait?
  • What is the cost of us paying the costs of expedited shipping to make up for the time that we spend assembling the items?
  • How does our forecasting need to change?  (it should be simplified)
  • How much can forecasting effort be reduced?
  • What are the impacts on our inventory? (assemble to order reduces the inventory costs)

The result of the supply chain strategy analysis should be the total cost of moving to an assemble to order environment. Everything is a series of trade-offs that must be calculated. Furthermore, a company may be able to use assemble to order for part of their business and make to stock for another portion.

Conclusion

Make to order is a bit of a canard. For companies that are in make to order environments naturally, they have a much easier supply chain planning challenge. That is a luxury that is mostly out of the control of the company.

While some companies may think this creates opportunities to move to make to order it is hard to see how it does. Make to order means that procurement orders are sent out when the order is received. However, this produces too much time for an overall lead time unless the product is customized. However, the opportunities for assembling to order are increasing, and this will mean more forecasting at the assembly or component level than at the finished product. The needs for forecasting will be as high, just at a different level in the bill of material.

The Problem: Where to Perform the Forecast for Assemble to Order Environments?

Under assemble to order, one can forecast either at the finished good or at the assembly. In scenarios where there are comparatively few numbers of input products versus the finished goods, the law of large numbers dictates that the forecast accuracy can be higher at the assembly. To test the optimal forecast location, a test can be performed at both the finished good level and at the assembly level. We have performed this analysis several times ourselves.

However, before doing this, the first step is getting the forecast error measurement squared away.

The 2nd Problem: Restricted on the Ability to Compare Forecast Errors for Grouped Product Locations

Companies use the standard forecast error measurements that do not drive companies to allocate forecasting resources effectively. As we covered in the article How to Use Weighted MAPE for Forecast Error Measurement, very few companies even weigh their MAPE. Secondly, the traditional forecast error measurements don’t work for intermittent sales histories because first, they provide a very high error. Still, secondly, they made it difficult to perform efficient grouped forecast error. Finally, intermittent sales history products share the same issue as high volume items in that forecasting systems are generally not designed to measure groupings of product locations, or to automate the process of forecast error measurement.

Being Part of the Solution: Automated Forecast Error Measurement

We developed the Monetary Forecast Error to be easy to understand and, much like a steering wheel, drive the attention to the areas that make the biggest impact on inventory improvement. This forecast error does process zeros in the demand history, it is naturally weighed, and it is naturally dollarized. We have incorporated this forecast error measurement along with automated forecast testing functionality into the Brightwork Explorer. This allows the forecast error measurement process to be automated as two forecasts can be easily compared to one another and then stored in the Brightwork Explorer.

Brightwork Forecast Explorer with Weighed Monetized Error Calculation

Improving Your Forecast Error Management

How Functional is the forecast error measurement in your company? Does it help you focus on what products to improve the forecast? What if the forecast accuracy can be improved, by the product is an inexpensive item? We take a new approach in forecast error management. The Brightwork Explorer calculates no MAPE, but instead a monetized forecast error improvement from one forecast to another. We calculate that value for every product location combination and they can be any two forecasts you feed the system:

  • The first forecast may be the constant or the naive forecast.
  • The first forecast can be statistical forecast and the second the statistical + judgment forecast.

It’s up to you.

The Brightwork Forecast Explorer is free to use in the beginning. See by clicking the image below:

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References

Make to Order

Replenishment Triggers

Getting the Terminology Right

The terms make to order and make to stock roll quickly off of people’s tongues regardless of their knowledge of other supply chain conditions. Many executives speak about “moving to make to order environment.” For most companies, this simply is not realistic. And many businesses that say they do make to order/configure to order/engineer to order are doing assemble to order planning.

The Universality of The Manufacturing Environment Type

These terms are specific types of manufacturing environments. They are embedded in almost all supply planning applications ranging from the most basic ERP to the most sophisticated advanced planning system. However, each manufacturing environment leads to some implications, implications that are most often not completely understood.

Getting Clear on Requirements Strategies

Requirements strategies are what control what drives the replenishment of supply in systems. In most cases, the need strategies control whether the forecast or the sales order triggers replenishment.

This book cuts down the amount of time that is required for people in companies to understand the relationship between manufacturing environments (the business) and requirements strategies (the technology setting in the supply planning application).

By reading this book you will learn:

  • What are the major manufacturing environments and what determines which manufacturing environment a company follows?
  • How do the different manufacturing environments impact how inventory is carried?
  • How are the various production environments configured in software?
  • What is mass customization, and how accurate is useful is this concept in real life?
  • What is the interaction between variant configuration and the manufacturing environment and the bill of materials?

Chapters

Chapter 1: Introduction
Chapter 2: The Different Manufacturing Environments
Chapter 3: Triggering Replenishment
Chapter 4: Requirements Strategies
Chapter 5: The Make to Order Illusion
Chapter 6: The Limitations to the Concept of Mass Customization
Chapter 7: Forecast Consumption
Chapter 8: Variant Configuration in SAP ERP
Chapter 9: Conclusion