Demand management in a make-to-order environment

A make-to-order environment is a pull-type of a production system. Here, demand in the form of an order triggers the production. In other words, the production begins after the order is received. It is used in businesses where the order quantity is less and where most of the order is custom-made. Thus, due to customization, many of its raw materials require sub-processing before they can be used in the final product.

From the point of view of the manufacturing strategy, the key strengths of this method are flexibility, quick decision making and employee cooperation. On the other hand, its weaknesses include a lack of infrastructure, technical superiority and financial resources (Furneaux & Roberts, 2019).

Advantages of make-to-order production

Since make-to-order production is custom-made, the customers require regular updates on the progress. Therefore, it is important to assess:

  • available design and planning,
  • skills and facilities required to alter the product,
  • estimating lead time,
  • estimated cost,
  • budget and profit margin,
  • effective coordination between the departments involved in the production activity (Saniuk & Waszkowski, 2016).

Moreover, in make-to-order, businesses maintain communication through close coordination between various supply chain stakeholders. Thus, purchasing, logistics and the lead time are of key importance. This form of a production system is very efficient in cases where the finished goods have defined configurations according to different customers. It is also efficient in cases where materials are segregated, i.e. they will be used in the specific product and in specific units as per customers demand (Gupta & Benjaafar, 2004).

Make-to-order over make-to-stock production type

Traditionally businesses adopted the make-to-stock production approach where goods are produced and stored in inventories according to the forecasted consumer demand. However, the problem with make-to-stock is that it is prone to wastage and is vulnerable to the products becoming obsolete. Whereas, make-to-order production system solves the problem of excess inventory and saves associated costs. The goal of make-to-order is to ensure improved customer satisfaction (Carr & Duenyas, 2000).

This strategy works best in the case of the highly configured products such as automobiles, aircraft and computer servers where quantity produced per product is low. Furthermore, it helps to reduce inefficiencies and provides businesses with a competitive advantage due to lowered lead times (Wemmerlöv, 1984).

Managing lead time in the make-to-order production environment

Lead time is the amount of time required to start the process until the end of the process. These complications lead the manufacturers to adopt strategic management practices in order to reap the benefits of MTO. This may include:

  1. Businesses should create a strong communication system with consumers. This functionality can be used to ensure that the customers are properly informed, and this can create a seamless and positive customer experience (Olhager & Östlund, 1990).
  2. MTO model is excellent for the perishable and custom products. Since materials are mostly utilised for a single order, material planning becomes an important aspect of management. However, not all raw materials are segregated. Some of them are interchangeable or common to other finished products as well. Thus, an efficient material planning system can significantly reduce the cost (Sen, Pokharel, & YuLei, 2004).
  3. Next, a strong scheduling and planning system can be used. This can help to bring production schedules at optimum levels. The planning can be used to combine the orders within the production workflow. As mentioned above in the material planning stage, the units produced can be combined in the production with other units being produced in order to take advantage of commonly used parts and material. This can possibly result in waste reduction, maintenance program and will help lower the variable cost of the product (Grandgirard, Poinsot, Krespi, Nénon, & Cortesero, 2002).

Case study of DELL

In contrast to the Apple case as reviewed in the last article, Apple’s major competitor Dell employs the make-to-order production strategy instead of make-to-stock strategy. Dell is the first company in the computer industry to build computers only after receiving an order. This helped them to understand what exactly the customer wanted. Therefore, in contrast to Apple, when Dell customers wanted to buy their product, they had to wait a few days before the computer was produced and delivered to them (Huang, Lu, & Wan, 2011).

Under this strategy, once the customer placed the order, Dell would typically assemble the raw material and then ship it directly to the customer. Thus, unlike Apple, Dell does not depend upon the estimation of demand for production activities. On the other hand, it had to be extremely careful regarding the purchase of raw material and management of its production capacity.  If Dell mismanages its supply chain system, it is highly susceptible to an oversupply of computers or undersupplies of raw material. This can disrupt its entire production process. On the other hand, if the company has excessive raw material, it loses money.

However, the company has updated its strategies significantly in recent years. The major reason behind this change has been its slippage from being the most successful PC makers to being just one of the high-tech giants. With the shift in the present-day customer’s needs, wants and expectations. Now since the customers want to receive their purchase instantly, customization is no longer crucial. Although Dell still pays close attention to its customers’ needs, it has recently shifted its focus to its supply base as well. Thus they now follow the segmented supply chain system.

Thus, both Apple and Dell have chosen the production strategy that they believed could probably maximize their profits. Apple believed that it can attract more customers by controlling the entire buying experience. This made them give much more emphasis on product availability in its stores. In the case of Dell, MTO production process best suited their company policy of assembly and standardized products. Dell’s customers are comfortable waiting for the product and ordering the computer they have never seen probably because they believe that Dell uses high quality and industry-standard components (Parvez, Ullah, Sabuj, & Islam, 2018).

References

  • Carr, S., & Duenyas, I. (2000). Optimal admission control and sequencing in a make-to-stock/make-to-order production system. Operations Research, 48(5), 709–720. https://doi.org/10.1287/opre.48.5.709.12401
  • Furneaux, B., & Roberts, B. (2019). MTO. Autistic Children, 182–194. https://doi.org/10.4324/9780429504563-9
  • Grandgirard, J., Poinsot, D., Krespi, L., Nénon, J. P., & Cortesero, A. M. (2002). Costs of secondary parasitism in the facultative hyperparasitoid Pachycrepoideus dubius: Does host size matter? Entomologia Experimentalis et Applicata, 103(3), 239–248. https://doi.org/10.1023/A
  • Gupta, D., & Benjaafar, S. (2004). Make-to-order, make-to-stock, or delay product differentiation? A common framework for modeling and analysis. IIE Transactions (Institute of Industrial Engineers), 36(6), 529–546. https://doi.org/10.1080/07408170490438519
  • Huang, S., Lu, M., & Wan, G. (2011). Integrated order selection and production scheduling under MTO strategy. International Journal of Production Research, 49(13), 4085–4101. https://doi.org/10.1080/00207543.2010.496797
  • Olhager, J., & Östlund, B. (1990). An integrated push-pull manufacturing strategy. European Journal of Operational Research, 45(2–3), 135–142. https://doi.org/10.1016/0377-2217(90)90180-J
  • Parvez, M., Ullah, N., Sabuj, M. A., & Islam, S. (2018). Profit Maximization of DELL Inc. through Build-to-Order Supply Chain for Laptop Manufacturing. American Journal of Industrial and Business Management, 08(06), 1657–1671. https://doi.org/10.4236/ajibm.2018.86110
  • Saniuk, A., & Waszkowski, R. (2016). Make-to-order manufacturing – New approach to management of manufacturing processes. IOP Conference Series: Materials Science and Engineering, 145(2). https://doi.org/10.1088/1757-899X/145/2/022005
  • Sen, W., Pokharel, S., & YuLei, W. (2004). Supply chain positioning strategy integration, evaluation, simulation, and optimization. Computers and Industrial Engineering, 46(4 SPEC. ISS.), 781–792. https://doi.org/10.1016/j.cie.2004.05.009
  • Wemmerlöv, U. (1984). Assemble-to-order manufacturing: Implications for materials management. Journal of Operations Management, 4(4), 347–368. https://doi.org/10.1016/0272-6963(84)90021-4

Ashni Walia

Research consultant at Project Guru
Ashni is a master of Economics from Amity University. She has been an active
member of Enactus and has participated in the 12th sustainability summit. She was also associated with the YES Foundation during her master’s programme. Apart from her interest in research, she has a keen interest in music and
reading fiction.
Ashni Walia

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