What is Make to Stock? (MTS)
What Is MTS (Make to Stock)?
Businesses utilize the make-to-stock (MTS) production method to match their inventory levels to expected consumer demand. A corporation employing MTS would determine how many orders its products could generate and supply enough stock to match those orders, as opposed to setting a production level and then trying to sell products.
How To Make Stock
To decide how much stock to manufacture, the MTS technique needs a precise forecast of this demand. The MTS approach is a productive option for production if the product's demand can be precisely predicted.
Problems with MTS
The MTS technique is, in theory, a mechanism for a business to get ready for both spikes and declines in demand. However, the construction of future demand projections with a foundation in historical data allows for the acquisition of inventory numbers and, subsequently, production.
If the projection is even a little bit off, the business can discover that it has too much inventory and little cash on hand, or too little inventory and untapped profit potential. The main drawback of adopting the MTS system for production is the potential for error. Inaccurate information might result in too much inventory, stockouts, and lost income. It may also result in a failure to meet demand, which would lower the possibility of earning money. Additionally, surplus inventory can quickly become a problem in industries with high turnover rates like computer technology or electronics.
Additionally, rather than maintaining a constant level of production throughout the year, an MTS method forces a company to reorganize operations at specified times. This routine adjustment ultimately results in high costs, which must either be passed along to the customer or borne by the business.
The ability of a company to accurately forecast future consumer demand for its products is essential to the success of the make to stock (MTS) strategy. MTS is difficult for any firm due to the normal unpredictability of the economy and business cycles, but the strategy is made even more complex when a company is in a sector with cyclical or seasonal sales cycles.
Alternatives to Stocking
Make-to-order (MTO) and assemble-to-order are two popular alternatives to MTS production methods (ATO). Both tie production to demand, but with MTO, manufacturing only starts when the business receives a legitimate order from a customer. ATO is something of a middle ground between MTS and MTO: While basic components are built in advance, final goods are not produced until a legitimate order is received.
The MTS approach is frequently used by manufacturing companies to plan for periods of increased production. For instance, a lot of businesses, including Target (TGT), produce the majority of their sales during the final three months of the year. A large portion of the output for the manufacturing firms supplying these merchants must occur in the second and third quarters of the year in order to meet the increased demand.
Using the MTS production technique, assume that The LEGO Group, the company behind the well-known LEGO bricks and other toys, reviews its historical data and predicts that demand would rise by 40% in the fourth quarter compared to the third quarter. To fulfill the anticipated demand for the fourth quarter, the company creates 40% more toys in July, August, and September. In the fourth quarter, LEGO also analyzes prior data to predict how much demand will fall from the end of the year to the first quarter of the following year, and adjusts production accordingly.
If LEGO is pursuing an MTO approach, it won't boost production of, let's say, its LEGO bricks by 40% until Target places a larger order. If it were using the ATO strategy, it might have the extra bricks manufactured and ready but wouldn't package them all up until it had Target's order. By sharing it with both Target and LEGO, the chance of an erroneous demand projection is reduced.
Making To Order Versus Making to Stock
Making products "to order" (MTO) means that producers wait until a consumer makes an order before beginning production. In this instance, goods are made specifically for the consumer based on their requirements.
MTO does not mandate that businesses maintain an inventory of the things they sell, in contrast to MTS. However, because it takes time to acquire all the necessary ingredients to make a bespoke good, there is a delay in delivering the finished goods to the consumer.
There is a flaw in the MTS method. Inventory is likely to remain unsold due to shifting consumer preferences and ongoing technological improvement. Resources are wasted as a result. Additionally, due to the expense involved, MTS does not permit businesses to retain a wide range of commodities. Companies in some specialized industries, including construction, switched to the MTO method to eliminate these problems.
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