Nothing is more exciting for small to medium manufacturing companies than to see their products take off and their operation begins to scale. And as companies begin to scale they should be keenly aware of the mode of production used to manufacture their goods.
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There are many production modes available and often the products or the market will determine which mode is required for a manufacturer.
Three of the most common modes of production are Make to Stock (MTS), Make to Order (MTO) and Assemble to Order (ATO). Make to Stock is used for high volume goods, commodified products, consumables and other product types where consumers purchase the same version of a product as a single unit or in bulk. It is a “push” production method used to provide a steady supply and stock for retailers.
Of the remaining two, MTO and ATO are similar. Make to Order (MTO) is a manufacturing mode where production begins once an order is received. It is a “pull” type production mode where demand in the form of an order triggers production. MTO is used on goods where the order is a quantity of one or a few and in situations where all or part of the order may be custom made or carry a high unit cost. Many of the components and raw materials may require sub-processing or rendering before they find their way into the final product.
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Assemble to Order (ATO) may follow many of the same steps as Make to Order. However, in ATO, few, if any, sub-processes are required, and units are assembled from completed components to make a whole unit.
Strategy for Manufacturing Process Flow
In MTS modes of production, planning and scheduling are the triggers for production. As a result, sales orders are linked to warehousing and bulk stock levels. Production and supply chain efforts are geared toward replenishing the stock required to keep the outbound orders supplied and in anticipation of new orders. The entire system requires a buffer, or safety stock, aspect that exists throughout the operation. Raw materials and components are purchased in bulk and on hand to keep production moving at a predictable level. Production also creates buffers in the form of Work in Process (WIP) to keep things moving and balanced.
In both MTO and ATO, different strategies are required. In these modes, the sales order is the trigger for production. Because of this, these modes require much closer coordination between vendors and production. In MTO and ATO, purchasing, logistics and lead time are key as there is often much less inventory of components. They are excellent modes for use where finished goods may have different customer-defined variant configurations or where materials are segregated, meaning they will only be used in a specific product for a specific number of units for a defined customer.
Advantages and Disadvantages of MTO and ATO
Advantages of MTO and ATO include:
- Cost – Because there is little to no safety stock set aside to produce volume targets, and because the production environment does not require a large amount of WIP, cost of MTO and ATO is lower than some MTS modes. MTO and ATO environments require less cost in the form of raw materials warehousing space and staff.
- Specialization – in MTO and ATO environments, orders can be made specific to customer requirements.
- Finished Goods Inventory – In an MTO or ATO operation, orders produced are already sold. This prevents the manufacturer from having to carry slow or no-selling units. This impacts cost in the form of warehouse space and staffing for finished goods. It also impacts cash flow and tax liability as no unsold units are left to tie up valuable cash over time.
Manufacturers who deploy MTO and ATO should be cautious in their planning as they can provide some headaches depending on the demand signal. Disadvantages of MTO and ATO include:
- Low Supply – Since orders are produced as they are received, MTO and ATO do not have a ready supply of units for purchase. In strong seasonal demand or if a model or product becomes widely popular, the lack of current availability may result in lost sales.
- Lead Time – As MTO and ATO are built on demand, lead times are longer for products than in an MTS.
Best Practices for MTO and ATO
To maximize the effectiveness of an MTO or ATO production mode, small to medium manufacturers should adopt best practices to realize benefits. These practices include things such as:
- Robust ERP/MRP System – Since MTO and ATO modes are triggered and driven directly by sales orders, a robust ERP or MRP system is required. The platform should have a strong linkage between its sales order and production planning functionality. Using this functionality can ensure the ability to keep customers informed and can also be used to accurately monitor inbound materials to create a seamless end to end customer experience.
- Materials Planning – MTO and ATO production modes are excellent for perishables, custom production, production with high unit cost, and production where materials are segregated and only used for the orders for one customer. However, this doesn’t mean that all components are segregated. Most assemblers and manufacturers use raw materials and components that are interchangeable or common to many of their finished products. Purchase planning can, therefore, be smoothed out for vendors with long lead times for common parts, not to create an inventory buffer, but because the commonality of the part combined with usage reporting will allow a steady stream of parts on a JIT basis.
One example would be a wiring harness that is used in all models of a manufacturer’s products. “Where Used” reports and consumption history can be used to plan inbound replenishments even though the finished goods will not be produced without sales orders. And If materials and components are segregated for some or all an order (meaning unique to that customer order), then establishing very close and well-defined vendor relationships is critical.
- Scheduling and Planning – A strong scheduling and planning system available through ERP and MRP systems will help plan production schedules at optimum levels. For one, relying on common parts and materials as mentioned in Materials Planning above will allow consolidating or combining production orders within the production workflow. Just because each unit produced must have a sales order doesn’t mean that it can’t be combined in production with other units being produced to take advantage of the commonly used parts and materials.
Another best practice is to utilize backward scheduling. Within many ERP systems, there is the ability to input due dates for the completion of orders and have the system generate manufacturing orders to meet those dates exactly. This helps to build JIT practices within the supply chain and manufacturing workflow simultaneously.
- Cost – Modern ERP/MRP systems can roll up costs accurately for custom orders. This accuracy allows managers to focus on process improvements in measured labor, waste reduction, maintenance programs and others that will help lower variable cost for the products.
And finally, as MTO and ATO leave little to no stock on the warehouse, iteration changes to existing models do not trigger “retrofitting” of finished goods inventory. With a strong ERP platform, changes can be implemented on “next unit up” to begin production with included changes immediately. Further, lot tracking and the ability to query and generate reports within the system allows a company to “follow” subtle design changes throughout the lifecycle of a product without obsoleting inventoried finished goods as there are none.
Mode of production is often dictated by the market or product produced. But once the mode is set, these best practices can be combined with a robust ERP system that uses intuitive toolsets, adaptable and agile functionality, and predictive analytics to provide small to medium manufacturers the tools to build an efficient manufacturing process flow to handle any level of scale.