What is the difference between MTS and MTO?

Principal Keyword: inventory management

Inventory planning is a challenging task, especially in respect of businesses, which have multiproduct and multistage manufacturing activities. The challenge gets further accentuated. As each inventory policy, has to be designed with a set of parameters that has to be tuned to fit every order. For this reason, it is necessary to devise an ‘inventory policy’, from time to time, to determine the inventory level. As well as, re-ordering mechanisms by taking into account the cost structure, the demand pattern, the product mix, etc.

In this article, we will elaborate on two methods:

  1. Make to Stock (MTS)
  2. Make to order, (MTO) respectively.

While we will spell out what they mean. We will also provide a data-driven leads briefly that can be of practical utility to your business in making decisions as to which one would suit the production process.

1. Make to Stock (MTS)

This method follows a production strategy wherein the manufacturers adopt a ‘make-to-stock model’, (MTS). It follows the principle of configuring the production of finished goods. Which makes it possible for them to maintain inventories at multiple locations within their network. And make sure that they can cater to the demands of their customers from time to time. This model is better suited to commodity goods/raw material suppliers, for instance, cement goods manufacturers.

Further, MTS is more suited for fast-moving stock-keeping units, (SKUs), wherein multiple channels have to be reached. For instance, from the manufactures to distributors and from there to the retail customers. For instance, FMCG manufacturers also tend to opt for this given the need to replenish the supplies of such goods that are in fast and according to the seasons.

The chief advantage it confers is the improvement in sales through the availability of the products. Which lessens the lead period of retention of inventory and thus lower the costs and improves the revenues and hence the profitability.

 2. Make to Order (MTO)

This scheme of production method follows when the supply lead-time (SLT) is lesser than that of the customer’s expectation lead-time, (CLT). Aided by appropriate software, the system automatically processes the machine’s capacity. Schedules the production accordingly, and determines the date of availability of the product

In this method, there is a firm order that place by the customer. Wherein the customer is prepared to wait for its delivery due to its long lead time. The advantage it confers is that the manufacturers can provide a firm commitment to their customers with a clear cut delivery schedule.

This method often suited to ‘project’ customers, makers of industrial machinery and equipment, and those in the ‘high-tech’ sectors.

Due to the realities that the manufacturers have to grapple with the problems of constant changes in the market conditions, they cannot rely on any one of the above models. To determine what we suggest, they take expert advice. Who would able to provide them with data-driven solutions and design inventory, production, and fulfillment planners.

They better position to provide you with data-driven solutions by devising:

  • An inventory planner to determine such issues, as ‘should you keep SKUs in inventory or not.
  • A production planner that would determine the mix of how much of the production capacity should allot to MTS and MTO.
  • A fulfillment planner, which would decide the eventual supply to the ultimate customer on time.

The above would go towards providing a practical solution, on a case to case basis. To choose the most appropriate method of production, which can reduce the inventory costs, working capital, planning of Capital Expenditure, (CAPEX), etc. These in turn would influence the MTS or MTO productivity and determine the profitability of your business.

The key take away of the article is that all businesses work towards realizing the objective of ‘on-time performance’ for which organizations would have to give their customers the right delivery times or the delivery lead times, whichever is appropriate. By deploying ‘MTS’ or MTO or a mix of them, they can fulfill the key metric of on ‘time performance’.

KEYWORDS: INVENTORY, CUSTOMER, PRODUCTION, MTS, METHOD, ORDER, MTS, and MTO, MANUFACTURER, DELIVERY, PLANNER

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