Make to Order (MTO) or Made to Order: Definition and Example

Make to Order (MTO)

Investopedia / Mira Norian

What Is Make to Order (MTO)?

Make to order (MTO), or made to order, is a business production strategy that typically allows consumers to purchase products that are customized to their specifications. It is a manufacturing process in which the production of an item begins only after a confirmed customer order is received. It is also known as mass customization.

Key Takeaways

  • Make to order (MTO), or made to order, is a business production strategy that typically allows consumers to purchase products that are customized to their specifications.
  • The manufacturing process of an MTO item begins only after a confirmed customer order is received.
  • Advantages to MTO include customization for customers, reduction in stock obsolescence and finished goods inventory, and overall waste.
  • Disadvantages to MTO include increased costs and increased wait times for a finished product.
  • MTO can be contrasted with make to stock (MTS) manufacturing, whereby inventories are produced in advance of consumers buying them off the shelf.

Understanding Make to Order (MTO)

The make-to-order (MTO) strategy means that a firm 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 when compared to purchasing directly from retailers' shelves.

This type of manufacturing strategy is referred to as a pull-type supply chain operation because products are only made when there is firm customer demand. The 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 order to manage inventory levels and provide an increased level of customization, some companies adopt the make to order production system. The MTO strategy relieves the problems of excess inventory that is common with the traditional make-to-stock 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.

The main advantage of the MTO system is the ability to fulfill an order with the exact product specification required by the customer. Sales discounts and finished goods inventory are 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.

Related to MTO is assemble to order (ATO), which is a business production strategy where products ordered by customers are produced quickly and are customizable to a certain extent. The assemble-to-order (ATO) strategy requires that the basic parts of the product are already manufactured but not yet assembled. Once an order is received, the parts are assembled quickly and sent to the customer.

Make to Order (MTO) vs. Make to Stock (MTS)

Traditional production methodologies produce products and stock them as inventory until a customer buys them. This is known as make to stock (MTS). However, this system may be prone to wastage and obsolescence, as inventory sits on shelves awaiting purchase. This problem is particularly acute in an industry like technology, where the pace of advancement is quick and the problem of obsolete inventory could quickly arise.

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. This is the main drawback of the MTS method of production. Inaccurate forecasts will lead to losses, stemming from excess inventory or stockouts, and in fast-paced sectors, such as electronics or computer tech, excess inventory can quickly become obsolete.

Limitations of Make to Order (MTO)

The two main drawbacks of make-to-order management are timeliness and cost of customization. If products are already on the shelf as with MTS, then a customer need not wait until the product is made, assembled, and delivered to spec. Cost is also a factor; pre-made and available products are all alike and so manufacturing costs are lowered due to economies of scale. Make to order will tend to be more expensive for the consumer since it involves customizable parts and finishes.

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