Definition
“Make to Order” is a production and inventory strategy in which companies manufacture products or deliver services according to each customer’s specific demand and customization requirements. In this approach, production only begins after a confirmed customer order is received. It helps businesses avoid surplus inventory and significantly reduces inventory holding costs.
Key Takeaways
- ‘Make to Order’ (MTO) is a business production strategy that typically allows consumers to purchase products that are customized to their specifications. It only starts the manufacturing process after receiving a customer’s order.
- This method is beneficial as it can minimize inventory costs as there is no need for storing large amounts of ready-made products. However, its drawback might be a longer waiting time for the customer because the product manufacturing starts only after the order is placed.
- Demand forecasting can be a significant challenge in the MTO approach. Accurate demand projection is difficult because production is directly linked to specific customer orders rather than anticipated demands.
Importance
The finance term “Make to Order” (MTO) is important because it refers to a production strategy that allows businesses to reduce their inventory costs and waste, resulting in efficient use of resources and improved profitability.
With MTO, a company only begins the manufacturing process once an order has been received from the customer, eliminating the risk of excess production or unsold goods.
Furthermore, MTO allows for a high level of customization, enabling companies to meet specific customer requirements, enhancing customer satisfaction and loyalty.
However, it also necessitates efficient supply chain management and timely production to ensure customer expectations are met.
Explanation
Make to Order (MTO) is a business production strategy that manages inventory and manufacturing processes in an efficient and cost-effective manner. It is typically used in industries where products are highly customizable or have a significant degree of differentiation.
This operational strategy allows for products to be made specifically according to customer needs and requirements thus ensuring high customer satisfaction. Producing customized products reduces the risk of excessive inventory, which might not be sold, especially in case of high-cost items.
Businesses employing this strategy monitor customer orders and only initiate manufacturing processes once an order is received and confirmed. MTO provides a good balance between inventory control, operational efficiency, and customer satisfaction.
It does not only help in reducing investment in unwanted stock but also aids in improving cash flow by receiving payments before the product’s manufacturing process. This strategy can contribute to better resource management in the company, allowing the allocation of resources to areas that will optimize profits and growth.
Examples of Make to Order
Automobile Manufacturing: A company such as Tesla employs a “make to order” model where customers can customize the particulars of their car–from the model to the color, interior design, and additional features. Once the customers order according to their preferences, Tesla then manufactures the car.
Furniture industry: Brands like IKEA and Pottery Barn often use the make-to-order model. For example, when a customer orders a sofa, they may have the options to choose the fabric, color, sofa legs, and other specifications. Once the details are decided, the manufacturer then produces the furniture piece according to the customer’s order.
Computer Hardware: Companies like Dell and Apple offer make-to-order services where customers can determine the specifications of their computers – from the type of processor to the amount of storage, to specific software packages. The computer is assembled only after the customer has placed their order with their specific requirements.
Frequently Asked Questions about Make to Order
What is Make to Order?
Make to Order, also known as MTO, is a production approach where the production of an item starts only after a customer’s order is received. This method is ideal for highly customizable products and prevents storage of unwanted inventory.
What are the advantages of Make to Order?
One of the main advantages of Make to Order system is that it allows for a high level of personalization. Customers can have products made exactly to their specifications. It also significantly reduces the cost for inventory storage as items are only produced after an order is received.
How does Make to Order impact the production process?
The Make to Order system significantly impacts the production process as it requires a close relationship between the sales and production teams. The production team must be able to respond quickly to demand and produce items as per customer specifications. It also requires a robust and efficient tracking system for each customer’s order.
Is Make to Order appropriate for all types of businesses?
No, Make to Order is not suitable for all types of businesses. It is best applied in businesses where products can be highly customized according to customer preferences and specifications, like furniture or custom-fitted clothing industries. On the other hand, businesses that produce standardized products in large volumes, such as canned food or bottled drinks manufacturers, may benefit more from a Make to Stock (MTS) approach.
What are the challenges of Make to Order?
While there are many benefits to the Make to Order approach, there can also be challenges. These include managing customer expectations on delivery times, ensuring regular communication between the sales and production teams, and controlling production costs. Also, since production only starts after an order is received, there can be longer customer wait times compared to the Make to Stock method.
Related Entrepreneurship Terms
- Custom Products
- Production Lead Time
- Inventory Management
- Customer Demand Forecasting
- Manufacturing Process Efficiency
Sources for More Information
- Investopedia: It provides information on a wide range of finance and investment-related topics, including the concept of “Make to Order”.
- Business Dictionary: This site offers clear, concise definitions of business-centered terms. You will find a clear definition of “Make to Order” and related concepts.
- Accounting Tools: It offers comprehensive resources on accounting and finance topics. The site has a good explanation of the concept of “Make to Order”.
- Corporate Finance Institute: It provides detailed and in-depth content on many complex financing topics including making to order.
