What is Make to Stock (MTS)?
Make to Stock (MTS) is a production strategy where businesses align their inventory with projected consumer demand. Rather than setting a production level and pushing to sell products, companies estimate potential orders and ensure sufficient stock to meet these expectations.
Key Takeaways
- Make to Stock (MTS) is aimed at matching inventory with forecasted consumer demand.
- MTS requires accurate demand forecasts to determine production quantities effectively.
- Businesses frequently need to adjust operations to align with this strategy, rather than maintaining steady year-round production levels.
- The primary downside of MTS is the risk of inaccurate forecasts, leading to overproduction or underproduction, both of which can harm financial performance.
Understanding How Make to Stock (MTS) Works
The success of the MTS method hinges on precise demand forecasting. If predictions are accurate, MTS can be highly efficient. However, inaccurate forecasts can lead to excess inventory and reduced liquidity, or insufficient stock and lost sales opportunities. Errors in forecasting can result in obsolescent inventory, especially in rapidly evolving industries like electronics. It also means spending more on adjusting production schedules, which can either increase costs for consumers or decrease profits for the company.
The inherent unpredictability of the market and business cycles makes the MTS method a complex choice, particularly for companies in sectors characterized by seasonal or cyclical sales.
Exploring Alternatives to Make to Stock (MTS)
Alternative production strategies that can circumvent the pitfalls of MTS include Make to Order (MTO) and Assemble to Order (ATO). In MTO, production begins only after a confirmed customer order is received. ATO, on the other hand, involves pre-producing basic components, but assembling the final product only upon receiving a customer order. Both strategies tie production directly to demand, reducing the risk of inaccuracies inherent in MTS.
Making Make to Stock Work: A LEGO Example
Many manufacturers adopt the MTS method to prep for peak production periods. For example, LEGO might anticipate a 40% increase in demand in the fourth quarter, based on past data. To prepare, they would increase production by 40% during the third quarter. Simultaneously, they would taper production following the forecasted decline in demand post-holiday season, thus optimizing inventory levels throughout the year. Contrast this to an MTO approach, where LEGO would only boost production upon receiving larger orders from retailers like Target.
The Benefits of Make to Stock
One significant advantage of MTS is its capacity to align inventory levels with anticipated consumer demand. This alignment helps avoid overstocking or understocking situations, potentially enhancing customer satisfaction and operational efficiency.
The Drawbacks of Make to Stock
The effectiveness of MTS heavily relies on accurate demand forecasts. Misjudgments can lead to either surplus inventory or shortages, both of which can negatively affect profitability and operational fluidity.
Conclusion
Make to Stock is a foundational manufacturing strategy aligned with predicted consumer demand. Its success is inherently tied to the precision of demand forecasts. Misestimations in these forecasts can result in either surplus stock or unmet demand, with detrimental effects on a company’s financial health.
Related Terms: Make to Order, Assemble to Order, Inventory Forecasting, Production Planning, Supply Chain Management.
References
- Siemens. “Make-to-Stock (MTS)”.
- Target. “Target Corporation Reports Fourth Quarter and Full-Year 2021 Earnings”.
