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 make to stock (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 excess 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, such as 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.

RELATED TERMS
  1. Make To Order - MTO

    Make to order is a business production strategy that typically ...
  2. Average Cost Method

    The average cost method is an inventory costing method in which ...
  3. Lower of Cost or Market Method

    The lower of cost or market method is a way to record the value ...
  4. Inventory Management

    Inventory management is the process of ordering, storing and ...
  5. Demand

    Demand is an economic principle that describes consumer willingness ...
  6. Inventory

    Inventory is the term for merchandise or raw materials on hand.
Related Articles
  1. Insights

    EU Says No to the LSE/Deutsche Boerse Merger

    The European Union has reject the proposed merger between London Stock Exchange and Deutsche Boerse citing antitrust concerns.
  2. Investing

    Business forecasting: Understanding the basics

    Discover the methods behind financial forecasts and the risks inherent when we seek to predict the future.
  3. Investing

    How to Analyze a Company's Inventory

    Discover how to analyze a company's inventory by understanding different types of inventory and doing a quantitative and qualitative assessment of inventory.
  4. Investing

    Why it is important to follow crude oil inventories

    Discover what oil inventories are, how they are communicated, and what important insights they provide into the state of the oil market.
  5. Investing

    Is Sales Growth Weaker Than Inventory Growth?

    Find out why Goldman Sachs Equity Research is concerned about inventory growth, which appears to be outpacing sales growth for many U.S. sectors.
  6. Personal Finance

    Alternate Methods Of Online Payment

    Paying by credit is one of the most common methods of payment for online shopping in the U.S. However, there are many other options worth testing out.
  7. Investing

    Understanding Periodic vs. Perpetual Inventory

    An overview of the two primary inventory accounting systems.
  8. Investing

    Uncovering Oil And Gas Futures

    Find out how to stay on top of data reports that could cause volatility in oil and gas markets.
  9. Financial Advisor

    What's Behind the Decline in Productivity Numbers? 

    There are several theories and hypotheses about low productivity numbers in the American economy. This article examines some of them.
RELATED FAQS
  1. When do you use installment sales method vs. the cost recovery method?

    Take a deeper look at the installment sales method and the cost recovery method of recognizing business sales revenue and ... Read Answer >>
  2. Is demand or supply more important to the economy?

    Learn more about the impact of supply and demand in an economy. Find out why companies study supply and demand as part of ... Read Answer >>
  3. Does working capital include inventory?

    Learn about inventory that is part of current assets and working capital, which is the difference between current assets ... Read Answer >>
  4. How does accrual accounting differ from cash basis accounting?

    The accrual and cash-basis methods recognize revenue and expenses at different times. In this article, we analyze the advantages ... Read Answer >>
  5. How does inventory accounting differ between GAAP and IFRS?

    Learn about inventory costing differences between generally accepted accounting principles (GAAP) and International Financial ... Read Answer >>
  6. How to calculate the inventory turnover ratio?

    The inventory turnover ratio is a key measure for evaluating how effective a company's management is at managing inventory ... Read Answer >>
Trading Center