What Is Make To Stock (MTS)?
Make to stock (MTS) is a traditional production strategy that is used by businesses to match the inventory with anticipated consumer demand. Instead of setting a production level and then attempting to sell goods, a company using MTS would estimate how many orders its products could generate, and then supply enough stock to meet those orders.
Make To Stock Explained
The MTS method requires an accurate forecast of this demand to determine how much stock it produces. If demand for the product can be estimated accurately, the MTS strategy is an efficient choice for production.
- Make to stock (MTS) is a traditional production strategy that is used by businesses to match the inventory with anticipated consumer demand.
- The MTS method requires an accurate forecast of this demand to determine how much stock it produces.
- An MTS approach requires a business to redesign operations at specific times, instead of keeping a steady level of production year-round.
Drawbacks of MTS
In theory, the MTS method is a way for a company to prepare for increases and decreases in demand. However, inventory numbers and, consequently, production, are obtained through the creation of future demand forecasts that have a basis in past data.
Should the forecast be even slightly off, the company may find they have too much inventory and limited liquidity, or too little inventory and unmet profit potential. This possibility of error is the primary disadvantage of using the MTS system for production. Wrong information can lead to excess inventory, stockouts, and revenue losses. It can also lead to an inability to meet demand, thus reducing income potential. Moreover, in fast-paced sectors such as electronics or computer tech, excess inventory can quickly become obsolete.
Also, an MTS approach requires a business to redesign operations at specific times, instead of keeping a steady level of production year-round. This regular adjustment ends up being costly, and the increased costs must either pass on to the consumer or be absorbed by the company.
The effectiveness of the make to stock (MTS) approach is entirely reliant on the ability of a firm to correctly predict the future demand customers will have for its products. The typical unpredictability of the economy and business cycles make MTS challenging for any company, but the strategy becomes particularly complicated when a business operates in a sector that experiences cyclical or seasonal sales cycles.
Alternatives to Make To Stock
Common alternative production strategies that avoid the downsides of MTS include make to order (MTO) and assemble to order (ATO). Both tie production to demand, but in the case of MTO, the output of an item begins after the company receives a valid customer order. ATO is something of a compromise between MTS and MTO: Basic parts are constructed in advance, but a finished product is not created until a valid order comes in.
Real World Example
Manufacturing companies often use the MTS method to prepare for periods of high production. For example, many retailers, such as Target (TGT), generate most of their sales in the fourth quarter of the year. 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, let's say that The LEGO Group, maker of the popular LEGO bricks and other toys, 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 toys in July, August, and September to meet the demand forecasts for the fourth quarter. Additionally, during the fourth quarter, LEGO 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.
If LEGO is adopting an MTO strategy, it will not increase the production of, say, its LEGO bricks by 40% until and unless Target sent in a larger order for them. If it were taking an ATO approach, it might have the increased bricks made and ready, but wouldn't put together complete packaged kits of them until it received Target's order. This way, the risk of an inaccurate demand forecast is mitigated, as both LEGO and Target share it.