Tuesday, October 11, 2016

Make To Stock vs. Make to Order

Make to stock (MTS) vs. Make to order (MTO) - What do they mean? 

In a Make To Stock environment production is triggered based mainly on forecasted demand, and any receipt from the production line is put into inventory (where customer orders are ultimately fulfilled from). A couple of scenarios to consider:
  • We receive a customer order 2 months before it needs to be delivered. i.e. We have an open Sales Order that shows in MD04. This order will not trigger a production process.
  • We receive a very large customer order today and do not have enough inventory to fulfill it? We'll have to wait until the next period produces enough product and tell the customer to wait... This is because what is produced this period is for customer orders requesting product in the next period. 
Look at this example: in the graphical display of MD04 we can see that there is a forecast for the next five months. We can also see that the MRP Run has created orders to fulfill those forecasts. Note that MRP generates orders with their latest possible delivery date standing just before the forecast is due (it does assume unlimited capacity).



 As we all know there is a another step necessary before we can start producing: the orders (standing all on top of each other at the latest delivery date) will have to be sequenced, leveled and scheduled into the previous period, so that we can build up inventory for next months' fulfillment of sales orders  
This situation becomes visible in the next graphic. Orders were distributed and scheduled (according to the capacity situation) for the next two months. What is not displayed here is how the inventory is consumed by incoming sales orders. that is because we're looking into the future here and the system doesn't know how the sales orders come in (if you had sales orders in the system for the second months, it actually would be displayed by a red bar going down and the green line (inventory) going down as well) 



Now what's really important here is that when all inventory forecasted for a period is exhausted and an additional sales order comes in (over and above what was forecasted), that sales order can only be fulfilled by safety stock or the customer will have to wait until the next period. 

Do not change the production schedule to fulfill the order if the order is part of a Make To Stock strategy! and this is where many processes and setups fail. A sales order for an MTS part triggers changes in the production schedule and the whole plan falls apart. Set a strategy periodically, know it and stick with it!