As a small to medium manufacturing company, few things are more important than the right deployment of best-operating practices to produce finished goods.
You can also listen to this article in our podcast –
These practices impact a company’s bottom line in terms of materials purchased, labour planning and utilization, inventory held in both raw materials and finished goods and in overall cash flow.
But the decision of which strategy to deploy depends on the product made and the mode of production required to produce it. In Assemble to Order (ATO), Engineer to order (ETO) and Make to Order (MTO), each unit purchased drives the production process. These systems are known as “pull” systems as they “pull” production through the shop floor based on orders on hand and the orders are the trigger for that production.
As a result, there is less raw materials inventory required and the raw materials that are in house are usually booked against committed orders or at most a very tight and predictable forecast. There is also little Work in Process (WIP) required for these production modes unless there are similarities in SKUs that are similar for like components and the order position is large enough. And, there is little to no finished good inventory as all purchased units are either shipped immediately or are staged to await completion of total order quantity through production prior to shipping to the end user. The dynamics that drive these production modes are very similar.
Make to Stock
Make to Stock (MTS), on the other hand, is dynamically different and is a “push” system. It is a more traditional production mode used for mass production of consumer goods, commodified goods and other products that are rapidly consumed on scale. In MTS, the goal is to match on hand finished goods inventory to forecasted demand and then create a push of the proper product mix through the production to replenish inventory against that anticipated demand.
In an MTS environment, forecasting is the trigger for production and must be accurate as products are made in volume. This forecasting, using historical data in conjunction with sales analysis, pushes production through the system to replenish stock levels. It also requires a buffer in the form of safety stock of finished goods as well as raw materials in anticipation of incoming orders. The raw materials and components required for production can be purchased in bulk and often utilize blanket and extended bulk orders through contracts over a longer period compared to MTO, ATO and ETO.
MTS generally uses a larger Work in Process (WIP) footprint compared to other production modes. As goods are produced en masse, partially finished or processed stock may be required to supply upstream, midstream and downstream intermediate subprocesses for smoother product flow throughout the system. This WIP allows longer production runs of similar SKUs to maximize equipment uptime, reduce changeover time and allow for better labour utilization and Overall Equipment Effectiveness (OEE).
Disadvantages of Make to Stock
While useful in controlling costs and protecting against opportunity loss in volume consumer or commodified goods production, MTS does have some disadvantages:
- Forecasts Must Be Accurate – An MTS system relies on the accuracy of forecasting to prevent stockouts or overstocks. Inaccurate historical data or sales analysis can lead to long term shocks within the system. Cyclical or seasonal sales cycles can have a large impact on the accuracy of these forecasts.
- Cash Flow Concerns – Small to medium manufacturers often experience critical cash flow issues based on raw materials held in inventory or tied up in WIP, or in finished goods awaiting purchase or shipment in the warehouse. For these manufacturers, even small variations to the MTS system can tie up operating cash making the overall business operation difficult.
- Inventory Must Be Accurate – Inventory in MTS environments has three distinct elements; raw materials, WIP and finished goods. And these systems must not only be accurate at each phase of production, accurate tracking and handoff from one element to the other must be accurately tracked as well. Inefficient inventory counts or valuations at any phase can impact cost and production as well as tax liability as inventory is taxed differently at each phase depending on applicable law.
- Risk of Obsolescence or Perishability – As many MTS products are rapidly consumed, a miscalculation of the forecast can render perishable goods unusable or require that cost be reduced to ensure their turn. Likewise, in industries such as electronics, overstock due to inaccurate forecasting may see the remaining stock rendered obsolete as new technology advances.
You may also be interested in Work in Process Inventory Accounting.
Best Practices for Make to Stock
Each of these drawbacks has a common element. All require accurate planning, forecasting, purchasing, analysis and decision-making. And each of those elements have a high degree of human interaction required to make an MTS system work. The heavy reliance on historical data and forward-looking analysis often obscures paths to improved efficiency because of this interaction as team members seek to make sense of the data, establish safety stock levels, negotiate contracts with vendors and plan production.
In many cases, small to medium manufacturers may also have a blended mode with some products being MTS and others being MTO or ATO. This compounds the problems caused by manual tracking, different data sets for different segments of the business (for example, scheduling may operate off one set of lead times while purchasing uses a more fluid set for inbound materials).
For small to medium companies looking to improve their MTS performance and improve efficiency and profit, they should look to common best practices to do so:
- Develop an Accurate Inventory Management System – No amount of forecasting can overcome an inaccurate inventory system. Inbound inventory should be tracked from the point of purchase through receipt and should be accurately located for quick use in production. The hand off from raw materials status to WIP should be accurately tracked as value added steps such as labor and consumable material is added at sub processing stages. And finished goods should be quickly located and correctly accounted for when complete. Latency within an inventory system is often the result of either the human component or manual design or both and can be overcome with a strong software system capable of providing seamless flow of transactions as goods move through the system.
- Manage Long and Short Supply Chain Legs in Materials Management – Most MTS systems buy a significant proportion of their materials in bulk. However, there are other materials and components that may be purchased locally or regionally that do not require the bulk purchases lock in lower cost. In addition to different lot size, lead times can vary sharply depending on the size of lot and distance travelled. This can create long and short legs within the supply chain that must be managed for balance. Here again, a robust software system with integrated purchasing, lead time monitoring, and costing can reduce human error and missed opportunities in balancing long and short supply chain legs. These systems will also integrate with inventory management systems to provide the manufacturer with JIT capability not possible with spreadsheet-based decision-making.
- Develop a Workflow-Based Production System – Many small to medium manufacturers began as many small operations. As a result, they often use spreadsheet-based production workflow planning or a mix of legacy systems that they outgrew long ago. This can create gaps and latency within the system that affects Overall Equipment Effectiveness, labour utilization, and other variables within production. Transferring these variables to a workflow-based production system that ties in with purchasing, supply chain and inventory management can provide decision-makers with visibility over the production floor down to the transactional level. Most modern software can integrate Bill of Materials, routings, workstation capacity planning, subcontracted operations, backward production planning, and many other feature rich elements that allow the shop floor to be optimized while tied into other departments digitally.
As manufacturing becomes more complex, human decision-making, legacy systems and spreadsheet-based planning become more difficult to maintain, adding a costly and inefficient burden to an already competitive world. All these best practices can be best achieved through the adoption of an agile, feature-rich, intuitive and modular ERP/MRP system. By doing so, small to medium manufacturers can find themselves on par with larger companies in the control and use of their data to run their MTS production mode optimally.