Take a close look at your inventory. Nearly every item you don’t ship to a customer and piece of raw material you don’t use in the manufacturing process is working capital you could invest elsewhere in the company.
Though most businesses only need enough inventory to meet their customers’ immediate demands, it may seem like a good idea to maintain an excess stock of your products to eliminate the risk of stockouts. However, producing and storing excess inventory can be a burden on your organization’s finances and resources. So how do you balance the goal of stocking ample inventory for just-in-time delivery with the desire to keep a safety stock for anticipated demands?
The answer to these questions lies in a production method that aligns inventory management with demand forecasting, such as make to stock (MTS).
What Is Make to Stock (MTS) and How Does It Work?
Make to stock (MTS) is a production technique where a company manufactures goods to match forecasted customer demand. Instead of setting production capacity and attempting to sell all goods produced, MTS involves estimating potential orders and producing enough stock to meet anticipated demand.
The make-to-stock technique is meant to help your business prepare for demand fluctuations. Inventory levels and production are determined through demand forecasting, which is based on past data. Production starts with demand projections and works backward to ensure inventory aligns with the forecasted needs.
Your forecast needs to be accurate to inform your production process. Otherwise, you may end up with excess inventory and limited liquidity or insufficient stock and lost profit opportunities.
Advantages of Make-To-Stock
If your company deals with standardized products and predictable demands, the make-to-stock strategy promises several advantages.
Optimized Resource Allocation
One of the biggest advantages of adopting MTS is the ability to optimize resource allocation. With MTS, you plan production based on anticipated demand. You can streamline resource usage and align it with demand to achieve economies of scale, reduce waste, and optimize storage and supply chain processes. This structured approach to production planning also eliminates the guesswork in resource allocation, helping your business avoid last-minute production adjustments.
Simplified Production Planning
Since decisions about when and how much to manufacture are based on demand forecasts in an MTS strategy, you can plan production according to a schedule. At any point, you can determine how much is left to be done and minimize production process uncertainties. With this technique, you can achieve consistent manufacturing runs and smoother coordination between departments, thus improving overall operational efficiency.
Quick Order Fulfillment
The make-to-stock approach makes finished goods available for sale when customers want them. Since products are already manufactured and held in inventory, your customers can choose the product to purchase with minimal wait time. Quick fulfillment can improve customer satisfaction and build brand loyalty, especially in a competitive market.
Challenges of Make-To-Stock
While the advantages of make to stock are promising, the strategy also has notable disadvantages.
Dependency on Accurate Forecasting
The biggest undoing of MTS is that its success heavily depends on accurate demand forecasting. If your business faces unpredictable demands or requires flexibility, MTS might not be the right strategy.
Even with the right data, consumer forecasts can sometimes be unreliable. For example, sales can drop during the expected peak season because of external anomalies, such as international conflicts or a recession. On the flip side, demand may shoot during an expected off-season. In such situations, MTS might limit your manufacturing strategies.
Risk of Excess Inventory
Even with accurate forecasts, you may end up with excess inventory in cases of market shifts. In sectors with ever-changing trends, such as fashion and apparel, stockpiling can lead to obsolescence. If customer preferences shift or your product becomes outdated, your company may be left with unsellable stock that needs to be discarded or discontinued.
Reduced Flexibility
MTS doesn’t leave room for product customization. After all, you manufacture products in advance based on the anticipated demand. This lack of flexibility can be a drawback if your company wants to offer tailored products for customers. Similarly, you may struggle to respond to quick, unexpected market changes, potentially losing sales opportunities.
Notable Make-To-Stock Examples
Most industries use the make-to-stock technique to prepare for high-production periods. By producing goods in anticipation of future demand, companies:
- Ensure their products are available during peak seasons.
- Minimize delays in order fulfillment.
- Keep customers satisfied, especially for high-demand standardized products.
Here are some real-world make to stock examples in action:
MTS in Retail
In retail, make-to-stock is essential for maintaining ready-to-sell inventory in stores and warehouses. For example, large retailers like Walmart and Target rely on manufacturers’ MTS strategies to ensure their shelves are stocked with the popular products consumers expect. Manufacturers supplying these retailers will anticipate retail demand spikes and start production to fulfill the need. This makes MTS particularly effective in retail, where rapid fulfillment is key to customer satisfaction.
MTS in Manufacturing
Manufacturers often use the make-to-stock approach to produce standard products with consistent demand. Take, for example, Apple and Samsung. The two tech giants employ MTS to manufacture their smartphone models and ensure a steady supply that meets global demand upon launch and throughout the product lifecycle.
MTS in Consumer Goods
Consumer goods companies rely heavily on MTS to meet the needs of mass-market buyers. Brands like Coca-Cola and Procter & Gamble manufacture large quantities of products based on past sales and predict how much people will want going forward.
What Is the Difference Between MTO and MTS?
Unlike make-to-stock, make-to-order (MTO) is a production technique in which you start manufacturing goods only after a customer places an order. This method allows you to manufacture customized commodities based on customer specifications.
With MTO, you don’t need to keep an inventory of goods you sell. However, customers need to wait longer for their order to be delivered than they do with MTS strategies, because manufacturing customized goods requires time.
Since MTO allows manufacturers to produce custom-made products, it’s better suited for situations where a variety of goods are produced. MTS doesn’t work well for diverse inventories because reliably predicting consumer demand for a large variety of products can be difficult. For this reason, manufacturers in specialized sectors like construction adopt the MTO system to meet unique customer demands without the burden of excessive inventory.
MTS Implementation: The Role of Demand Forecasting and Inventory Control
Implementing a successful make-to-stock strategy hinges on two critical components: demand forecasting and inventory optimization. These two elements ensure your company can produce and maintain stock levels that meet customer expectations while minimizing waste and cost.
To forecast demand and ensure profitable inventory management, you’ll need insight into:
- Sales frequency pattern to predict demand.
- Demand trends to mitigate the risk of obsolescence.
- Sales value and volume to guide decisions on which products qualify for the MTS strategy.
- Expected customer and supply lead times to align the production schedule with customer expectations.
- Order volume distribution to analyze products with consistent orders.
Besides helping you understand how supply chain design influences planning, these insights will guide MTS decisions and inform your product strategy.
MTS Optimization: Determine Profit-Optimal Trade-Offs
With accurate sales trends and inventory data, you can navigate trade-offs between inventory levels, production efficiency, and profitability. The trade-offs revolve around balancing the cost of carrying inventory with the ability to meet customer demands in a timely fashion, with the goal of maximizing your profit margins.
The GAINS supply chain platform provides actionable, real-time insights into your supply activities to help you plan your distribution network and optimize your made-to-stock strategy. You’ll take advantage of an advanced analytic tool to help you improve demand forecasting and inventory management. Even in the face of uncertainty, GAINS will help you anticipate demand shifts to maintain a resilient MTS strategy. Request a demo today to learn how GAINS can help you inform your manufacturing plans and decision-making process.