Traditional production systems produce products and stock them as inventory until they are sold (make-to-stock). In order to reduce inventory and increase the level of customization, some firms have designed their production systems to produce a product only after it is ordered. Such systems are referred to as make-to-order.
Make-to-order systems are not appropriate for all types of products, and the make-to-order versus make-to-buy decision must be weighed carefully. The following are some factors to consider when evaluating the prospect of make-to-order:
Value of a custom product: Are customers willing to pay more for customization?
Customer patience: Are customers willing to wait for a custom product to be manufactured and delivered? If not, the cost of losing the customer to the competition is the margin on the product, plus the value of any future purchases that may be lost as a result of the customer's switching to the competition. Even if the customer switches to another model from the same firm, a loss of goodwill may result.
Cost of stockouts: Assuming the customer is patient enough to wait the specified delivery time, make-to-order eliminates the problem of stock-outs. If stock-outs are estimated to have a relatively large cost associated with them, make-to-order becomes more attractive.
Inventory holding costs: Does the product lose its value quickly? Is it easily damaged? Do customers demand a high level of variety (and therefore higher inventory costs)? Make-to-order becomes more attractive as inventory holding cost increases.
Modularity: If the product is modular, component inventory costs can be reduced since less safety stock is required.
Manufacturing lead time: A long lead time may render a make-to-order system infeasible if the customers are not willing to wait.
Manufacturing set-up costs: If set-up costs are high, make-to-order might incur too large a cost penalty relative to the benefits of customization. Automated flexible manufacturing systems help to reduce set-up costs.
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