- 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.
- There are many extra costs associated with make to order.
- We provide a specific example of make to order from our book.
- 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.
What Goes Unmentioned
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
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.
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.