Business Production Strategy

We’ve been running a series of investment strategies under the business category to help better broaden your knowledge in terms of the financial world of investing. We also learning a lot on this journey with you. Hope you find this article useful in broadening your knowledge.

Make to order (MTO) is a business production strategy that typically allows consumers to purchase products that are customized to their specifications. The make to order (MTO) strategy only manufactures the end product once the customer places the order, creating additional wait time for the consumer to receive the product but allowing for more flexible customization compared to purchasing directly from retailers’ shelves.

The make to order (MTO) strategy relieves the problems of excessive inventory that is common with the traditional make to stock (MTS) strategy. Dell Computers is an example of a business that uses the MTO production strategy wherein customers can order a fully customized computer online and receive it in a couple of weeks.
Traditional production methodologies produce products and stock them as inventory until a customer buys them. This is known as make to stock or MTS. However, this system was prone to wastage and obsolescence. In order to manage inventory levels and provide an increased level of customization, some companies adopted the make to order production system.

Make to order, also referred to as build to order (BTO) or made to order (MTO), is a manufacturing process in which the production of an item begins only after a confirmed customer order is received. This type of manufacturing strategy is referred to as a pull-type supply chain operation because products are only made when there is a firm customer demand. This pull-type production model is employed by the assembly industry where the quantity needed to be produced per product specification is one or only a few. This includes specialized industries such as construction, aircraft and vessel production, bridges, and so on. MTO is also appropriate for highly configured products such as computer servers, automobiles, bicycles or products that are very expensive to keep inventory.

In the production of automobiles, MTO is a production strategy that is demand driven. That is, a product is planned and built in response to a final customer order. A final customer order is from a known, individual owner and excludes orders by the original equipment manufacturer (OEM), dealers or points of sale or bulk orders.

The main advantage of the MTO system is being able to fulfill an order with the exact product specification required by the customer. Sales discounts and finished good inventory is also reduced and stock obsolescence is managed. However, for an MTO system to succeed, it should be coupled with proactive demand management. It should also be considered that the MTO system is not appropriate for all types of products.









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