What does 'Make To Stock - MTS' mean
Make to stock (MTS) is a traditional production strategy that is used by businesses to match production and inventory with consumer demand forecasts. The (MTS) method requires an accurate forecast of demand in order to determine how much stock should be produced. If demand for the product can be accurately forecasted, the MTS strategy is an efficient choice for production.
BREAKING DOWN 'Make To Stock - MTS'The effectiveness of an MTS strategy is completely reliant on the ability of a company to predict the future demand of its customers. This becomes increasingly challenging when a company operates in an industry with cyclical sales cycles or seasonality. It is also generally hard to implement an MTS strategy due to the fact that the business cycle is naturally unpredictable.
Therefore, the main drawback to the MTS method of production is that inaccurate forecasts will lead to losses, stemming from excessive inventory or stockouts. Common alternative production strategies that avoid this downside include make-to-order (MTO) and assemble-to-order (ATO).
An Example of the MTS Method
Manufacturing companies often use the MTS method to prepare for periods of high production. For example, many retailers, like Target, generate most of their sales in the fourth quarter of the year. This means, however, that for the manufacturing companies supplying these retailers, a majority of their production has to come in the second and third quarters of the year, to prepare for the increases in demand.
Using the MTS production method, a manufacturing company looks back at its previous years and surmises, based on past data, that demand will increase by 40% in the fourth quarter versus the third quarter. To prepare, the manufacturer produces 40% more of its products in July, August and September to meet the demand forecasts of the fourth quarter. Additionally, during the fourth quarter, the manufacturing company looks at past numbers to see how much demand will decline from the end of the year to the first quarter of the new year, reducing production accordingly.
Drawbacks of the MTS Method
In theory, the MTS method is a great way for a company to prepare for increases and decreases in demand. However, inventory numbers, and therefore production, are derived by creating future demand forecasts based on past data. There is a high likelihood that the forecasts will be off, even if by just slightly, meaning that a company might be stuck with too much inventory and too little liquidity.
Additionally, an MTS approach requires a company to retool or redesign operations at specific times, rather than having an even amount of production throughout the year. This is costly, and the increased costs have to be realized by either the end consumer or the company itself.