Make-to-order versus make-to-stock: What’s best for your business?

Running a business that manufactures products is tough. You have to balance meeting customer demand with efficient delivery — without breaking the bank.

So, how do you balance a customer’s expectation for speed with the lead time required to produce the items? The answer lies in understanding the right production strategy: make-to-order (MTO) versus make-to-stock (MTS).

In this article, we’ll cover the key differences between MTO and MTS manufacturing and provide insights to help you decide which method best suits your business.

What is make-to-order production?

MTO production, also known as build-to-order (BTO), is a manufacturing strategy where production is driven by demand rather than forecasts. In an MTO system, production begins after customers place an order. Each product is crafted to meet that customer’s requested specifications, meaning MTO is best for businesses selling bespoke or highly customizable products.

Make-to-order example

Imagine a company that creates shelving for households. Unlike traditional manufacturers that produce standard sizes in bulk, this company allows customers to design a storage solution. When ordering, customers specify the size, layout, and material to perfectly match their space and needs, whether they’re maximizing a closet’s space or organizing their garage.

Here, MTO benefits both the customer and the manufacturer because:

• Customers achieve optimal functionality, as custom shelves eliminate wasted wall space and accommodate specific requirements
• The manufacturer avoids keeping a large inventory of pre-made items, saving on storage costs and reducing the risk of dead stock

Advantages of make-to-order

MTO offers numerous benefits for businesses — especially those that emphasize customization and efficiency. 

1. Customization

MTO allows businesses to create products tailored to each customer’s needs, significantly enhancing customer satisfaction. And satisfied customers are more likely to remain loyal to a brand. This can lead to higher retention rates and positive word-of-mouth referrals, boosting the business’s reputation and market position.

2. Reduced inventory costs

MTO produces items after confirming a sale, eliminating the risk of unsold inventory piling up in warehouses. This approach ensures goods don’t become dead stock that require discounts or disposal, and businesses see savings on storage, handling, and production costs.

3. Minimized waste

MTO tackles waste head-on. Unlike traditional manufacturing, which often results in leftover scraps or extra goods from large production runs, MTO only creates the amount of product ordered. Aligning production with actual demand prevents overproduction and promotes sustainability.

4. Increased efficiency

Only producing orders that have already sold reduces common inefficiencies found in mass production, like poor resource allocation or batches with defects.

Disadvantages of make-to-order 

While MTO has many benefits, it also comes with some drawbacks. Below are some disadvantages of adopting the MTO approach.

1. Longer lead times

In an MTO approach, customers might wait longer since production begins after orders are placed. Depending on the complexity of the product, it could take several weeks to design and produce the product and then several more for delivery. These longer lead times could affect customer satisfaction and drive them to competitors with faster delivery. 

2. Irregular sales demand

The MTO approach deals with less predictable customer demand, which could lead to inconsistent production schedules, often resulting in bursts of intense activity followed by slow periods. This inconsistency makes stocking raw materials or staffing operations harder and could create greater delivery delays.

3. Higher production costs

Bespoke products often have more complex processes and materials, leading to higher production costs than standardized production. The custom manufacturing equipment in an MTO setup might involve intricate design work, precision engineering, and the use of premium materials, which all raise costs. Plus, if you aren’t selling orders, it would increase the idle time that mass production would avoid.

Additionally, the customization and variability in MTO processes make it harder to automate. Consider the shelving example. If each unit is unique, it’s hard to create an assembly line where each worker has a clear responsibility. This added complexity costs time and energy, increasing your labor and production expenses. 

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What is make-to-stock production?

MTS production, also known as Build-to-Stock (BTS), is a manufacturing strategy where companies produce products based on forecasted demand, storing them as inventory until sold. This method is ideal for businesses offering standardized products with predictable demand patterns. It ensures quick delivery and helps meet customer expectations for fast service.

Example of make-to-stock

Let’s say a company that makes standard pallet racks for warehouses and distribution centers uses the MTS approach. They produce these racks in large quantities based on demand forecasts and store them in warehouses. When a customer places an order, the racks are ready for immediate shipment, allowing the company to quickly meet demand. Producing racks in bulk also lowers production costs and minimizes downtime, offering potential for automation and consistent outputs that make the process more efficient and cost-effective.

Advantages of make-to-stock

Unlike MTO, which adjusts schedules based on incoming orders, MTS benefits from predictable planning. This offers several benefits for businesses that produce standardized products. 

1. Reduced customer wait times 

Products are ready for immediate shipment with the MTS approach, leading to shorter lead times and improved customer satisfaction. 

For example, a company that produces winter coats can quickly fulfill orders in the colder months when these goods are in high demand because they’re already in stock. Plus, year-round production creates safety stock that prevents stockouts and better meets the surge in demand when the weather turns.

2. Optimized resource allocation 

In an MTS approach, producing large batches based on forecasted demand lowers the cost per unit, since the setup fees are less frequent and pay for more product. You can automate more processes to streamline manufacturing.

3. Simplified production planning 

MTS simplifies scheduling by using demand forecasts to create a production plan. This approach allows companies to allocate resources efficiently, avoiding last-minute changes and optimizing the use of labor and machinery. 

Disadvantages of make-to-stock

Like any manufacturing method, MTS has several drawbacks to consider. 

1. Forecast dependency 

Accurate demand forecasting is critical in an MTS method. Predicting the demand for items with varying appeal to customers — including seasonal clothing, like winter coats — can be challenging and may result in surplus stock or unmet demand.

2. Risk of excess inventory 

Because MTS involves holding large quantities of stock, there’s an increased risk of dead stock. This can lead to financial losses, especially in industries with rapidly changing trends, such as fashion, where items quickly become outdated.

3. Increased storage costs 

Maintaining large inventories requires significant storage space, increasing operational costs. Companies must invest in warehousing and inventory management systems to handle the high volumes of stock. Both the fixed and variable costs associated with maintaining inventory add up quickly.

What’s best for your business?

Choosing between MTO and MTS depends on your product’s complexity and demand patterns. Here’s a detailed comparison to help you make an informed decision:

Choosing the best approach for your business

To decide between MTO and MTS, consider the following factors:

1. Product complexity: If your products require significant customization and vary greatly between orders, MTO is likely the better choice. For standard products that don’t change much, MTS is more efficient.
2. Demand variability: MTO is ideal for markets with fluctuating or hard-to-predict demand, as it minimizes the risk of excess inventory. MTS is beneficial for stable markets where demand can be accurately forecasted.
3. Customer expectations: Assess how important quick delivery is to your customers. If they expect rapid fulfillment, MTS can meet this need. If they value customization and are willing to wait, MTO is preferable.

Transform your operations with Fishbowl’s inventory management software

Regardless of whether you choose MTO or MTS, effective inventory management is what keeps operations rolling smoothly. Fishbowl’s inventory management software provides a comprehensive solution for managing inventory, warehousing, and manufacturing processes. You’ll be able to track your products, whether they’re bespoke or uniform, all the way through the supply chain.