Make To Stock (MTS)

What is Make To Stock (MTS)?

Make to Stock (MTS) is a conventional production technique wherein producers produce commodities on a large scale in accordance with anticipated consumer demand. Some of the commodities are put up on the shelves of the shop for customers to purchase, and the rest is stored as inventory.

MTS production technique offers a quick response time because customers can purchase and receive delivery of commodities at the same time. MTS is a “Push Supply Chain” strategy. In a push supply chain strategy, decisions on when to produce and how much to produce depend on anticipated customer demand.

Consumer Demand and Make To Stock

Consumer demand forecasts are made by using statistical methods like trend projection and regression analysis. Trend projection uses past data on sales and consumer preferences to make projections about the future. Regression analysis establishes relationships between demand and the factors affecting it, like price and income, to estimate future demand.

However, such forecasts are not always accurate and can sometimes be misleading. Changing consumer preferences, natural calamities, and other unforeseen circumstances can result in inaccurate demand projections and lead to wastage and loss.

Naturally, manufacturers, distributors, and retailers need to make detailed plans on when to start production and distribution to ensure that finished goods are present in the shops at the right time for buyers to purchase them.

Advantages of Make To Stock

1. Efficient use of resources

Production is planned well in advance based on expected demand. Therefore, the use of resources is also planned accordingly, facilitating efficiency.

2. Economies of scale

Since goods are produced on a large scale, the fixed costs of production are divided equally over a large number of units produced. It drives down the average cost of production per unit and lets companies avail of the benefits of economies of scale.

3. Scheduling

Decisions on when to produce and how much to produce are made in advance. Therefore, work can progress smoothly according to a schedule, and at any point in time, how much is left to be done can be determined.

4. Quick response time

The finished goods are available in the shop, ready for immediate sale. The customer can choose a product to purchase and take delivery of it at the same time.

Disadvantages of Make To Stock

1. Inaccuracy of forecasts

Forecasts for consumer demand can sometimes be misleading. Sales can be unusually low during an anticipated peak season due to some external anomaly, such as a recession. On the other hand, demand may pick up unexpectedly during an anticipated off-season.

2. Inventory levels

Despite the best efforts at making accurate forecasts, inventories may fall short or remain in excess perpetually.

3. Unpredictable consumer preferences

The decision to produce a certain quantity of a commodity is made on the basis of expected demand. However, customer preferences and trends keep changing continuously. So, there is always a risk of inventories going waste due to obsolescence.

Make To Stock vs. Make To Order

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 this case, commodities are produced in a customized manner according to the specifications of the customer.

Unlike MTS, MTO does not require companies to keep an inventory of the goods they sell. However, there is a delay in delivering the finished goods to the customer because it takes time to gather all materials to manufacture a customized good.

The MTS technique suffers from a drawback. Owing to changing consumer preferences and continuous technological advancement, inventories are likely to remain unsold. It results in wastage of resources.

In addition, MTS does not allow companies to keep a wide variety of goods because of the cost associated with it. In order to do away with such issues, companies in certain specialized sectors, such as construction, shifted to the MTO system.

Delayed Differentiation

 The made to Stock and Made to Order techniques come with their own drawbacks as well. In order to find the most efficient method of production that incorporates the best features of both MTS and MTO, companies use the Delayed Differentiation (DD) strategy.

Under the DD hybrid strategy, a common product base is made to stock in the first phase. The second phase occurs after the demand is realized. The product base is modified and given certain customized features and components. The transformed final product is then delivered to the customer.

Advantages and Disadvantages of Delayed Differentiation

The Delayed Differentiation strategy reduces the risk of wastage of inventory. By keeping stock of semi-finished goods, it eliminates the risk of obsolescence. All technological innovations can be incorporated in the second phase of the manufacturing process.

The DD method also reduces the time taken to deliver the final good to the customer. In fact, it effectively eliminates the drawbacks of both MTO and MTS techniques. For example, pizza delivery joints keep a stock of baked pizza bases. Then, depending on what an individual customer prefers, they customize each pizza by adding toppings.

However, the strategy can only be used in limited industries. For example, it cannot be applied in the case of packaged food.

More Resources

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

• Cost of Goods Manufactured (COGM)
• Make To Order (MTO)
• Supply Chain
• Days of Inventory on Hand (DOH)