What is Make To Order (MTO)?
Make to Order (MTO) is a production technique in which producers start manufacturing a product only after the customer places an order for it. In such a case, commodities are produced in a customized manner according to the specifications of the customer. The MTO production technique is most suitable for specialized sectors of the industry, such as aircraft manufacturing, construction, etc.
MTO is also referred to as a “Pull Supply Chain” strategy. A pull supply chain strategy is one where the entire process of production, assembly, and distribution of any commodity is driven by actual consumer demand. The process of manufacturing goods starts only once an order is received from the customer, and the number of units produced also depends on the instructions of the customer.
- Make to Order (MTO) is a production technique in which producers start manufacturing a product only after the customer places an order for it.
- Unlike Make to Stock, MTO does not require companies to hold inventories of finished goods. Therefore, there is no risk of wastage of inventory.
- Since it is made according to specifications of the customer, delivery times are much more lengthy than other generic goods.
Advantages of Make To Order
1. Reduces wastage
When a stock of goods lies unsold, there is a wastage not only of the materials used to make them, but also the money and labor put into producing them. In MTO, since products are manufactured after receiving a customer’s order and in the quantity specified, wastage and loss are minimized.
2. Less inefficiency
When a large variety of goods are made on a large-scale basis, there is a risk of inefficiency because workers and machines need to adhere to different rules. In MTO, all efforts are focused on making the product according to the specifications of the customer, so workers and machines tend to be more efficient.
3. Greater variety
Since only customized goods are produced and sold, MTO offers a greater variety of products. In fact, it provides customers the product exactly the way they want it.
Disadvantages of Make To Order
1. Irregular sales
It is difficult to determine when demand may arise for a particular customized product. So, there may be periods of high sales and months of no sale at all. For example, the demand for military aircraft arises in times of hostile international relations, but such situations cannot be predicted in advance.
2. Lengthy delivery time
Since production starts after receiving an order, the product reaches the customer after some time. Moreover, because it takes time to customize the product, the delivery time may take longer.
3. Availability of raw materials
The uncertainty of demand raises the necessity of keeping a sufficient supply of raw materials so that production can start immediately after receiving an order. In case the raw materials are not ready, it takes more time to procure them and deliver the final product to the customer.
Make to Order vs. Make to Stock
Make to Stock (MTS) is a more common production technique wherein producers produce commodities on a large scale and put them up on shelves in the shop to be sold. Whatever is not sold immediately is stored as inventory.
When goods are stored in such a way for a long time, they tend to become obsolete or go to waste. In response to such a drawback, production techniques shifted to Make to Order, especially for sectors like technology, in which obsolescence is predominant.
MTO removes the dependence of companies on forecasts of consumer demand, which can be inaccurate and misleading sometimes. It instead focuses on actual demand and eliminates the risk of obsolete inventories.
The Make to Order method was introduced to make up for the drawbacks associated with the Make to Stock process. However, MTO was not practical for all commodities. The long delivery times and the added costs associated with customized products restricted the scope of MTO to only a few specialized industries, such as construction and defense goods.
Delayed Differentiation (DD) was developed as a hybrid strategy, combining elements of both MTS and MTO, to be used in industries where the disadvantages of the two methods are apparent. It is carried on in two phases.
In the first phase, as in MTS, a common product base is made to stock. Thereafter, in the second phase, the product base is modified and customized according to the specifications of the buyer as in MTO. The customer takes delivery of the product once it is ready as per their instructions. For example, textile stores sell trousers of the same measurement, but they make necessary alterations to a particular pair of trousers to fit a particular customer before delivering it.
Keeping an inventory of semi-finished goods eliminates the risk associated with wastage and obsolescence of materials. Also, because it takes less time to add finishing touches to the product, the delivery time is shorter. Therefore, with the characteristics of both MTO and MTS methods, DD effectively eliminates all of the other methods’ drawbacks.
CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful: