Pick the right Production Strategy – make to order | make to stock | engineer to order
Pick the right Production Strategy
Companies that manufacture a product need to balance three goals that’ll often conflict with one another: customizing products to meet their customers’ needs; filling orders quickly; and keeping costs low. Let’s take a look at three different manufacturing strategies that can help you manage these trade offs and find the right balance for your supply chain.
We’ll use the example of buying a car to show how each of these manufacturing strategies work. Imagine walking into a dealership and looking at one of the cars on the showroom floor. That car’s actually inventory or stock that was manufactured using a Make to Stock production strategy. With a Make to Stock strategy, you manufacture products in advance so you have them ready for a customer to buy and you can keep manufacturing costs low and provide customers with short lead times because you’re planning ahead. But the drawback is that it’s often hard to predict how much your customers are going to buy and when they’re going to buy it. As a result you end up carrying inventory which eats up working capital for your business and increases your overall operating costs.
Now let’s say that you want a car that isn’t in the showroom. You want your car to be a red convertible with the luxury package. Instead of carrying every possible configuration for the car in their inventory, the dealer can use a Make to Order production strategy. With a Make to Order strategy, the factory would have all of the parts ready but they wouldn’t assemble your specific car until they’ve received an order, and because they’re making that product for a particular customer they can tailor it to their exact preferences.
Make to Order reduces the cost of holding on to inventory but it means that your customers will need to wait a little longer. Waiting is bad because sometimes customers need the product right away, so they might decide to buy it from one of your competitors instead. Also, with a Make to Order strategy, it can be harder to plan your production schedule, which could end up increasing your manufacturing costs. Now, let’s say that you want some really special modifications to your car, like installing a race car engine.
Now the third manufacturing strategy: Engineer to Order. With an Engineer to Order strategy the product is totally customized, so you can’t buy the parts in advance and you can’t start producing the product until you’ve received specifications from your customer.
An Engineer to Order strategy usually has the longest lead time and the highest cost, but your customer gets exactly the product they need and you don’t spend money on inventory. Every manufacturer uses a combination of Make to Stock, Make to Order and Engineer to Order in their supply chain. When you use the right production strategy to manage the trade offs in time, cost and customization, you can design a supply chain that aligns with your customers’ needs and maximizes the profitability for your operations.