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 very small 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 which produces small batches. The job shop or job shop would create custom items.

The reason for the naming is that the job shop (plant) simply 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 greatly 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 true 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 which 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 a make to stock environment is primarily dependent on the market they are in and the type of product that they sell.

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 is 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, but 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 SCM Focus 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, in fact, 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 made 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 very hard 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 very simple 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.

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.

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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