What is MTS, MTO, and ATO? When looking at production and inventory strategies, it is a good idea to look at how time affects your business model. More specifically, we need to look at the lead times and production times for your product. How long should it take from the point a customer places an order to when they receive the product? How does production fit into this timeline? Does production take place before or after the order has been made?
These may seem like fairly simple questions but finding the specific answers takes hard work, intelligent planning, and a strategy that fits your product. We want to decrease lead times as much as possible but we also want to maximize production and quality while inhibiting cost, risk, and potential waste.
But should you use MTS, MTO, or ATO? Which one fits the needs of your operation, supply chain, inventory, and customers?
MTS, MTO, & ATO: Which One Should You Use?
Choosing between MTS, MTO, and ATO is highly dependent on your product and the demand for that product. Soft drink manufacturers need to pursue different strategies compared to car manufacturers. As different as the products are, the methods they employ are equally different. And there are inherent advantages and disadvantages to every strategy.
But before we dive too deep into “what is MTS, MTO, ATO?” and their strategies, it will be useful to briefly explain push vs. pull manufacturing methods.
What is Push vs. Pull Manufacturing?
In Push vs Pull Manufacturing: Which is Best for You?, we discussed the different ways in which manufacturers can either push their product onto the market from already established inventory or adopt lean practices that enable current demand to dictate the rate of production.
In case you don't have time to read the full article, here’s a short definition of push and pull manufacturing that will help everyone understand this article a little better.
- Push Manufacturing: Production is not linked to current demand. Rather, production schedules and amounts are dictated by a forecasted demand. Companies will produce a certain amount of stock and then push their product onto the market from an already established inventory.
- Pull Manufacturing: Production is directly linked to current demand. When customers place an order, production and distribution are directly affected and stimulated. This prompts production to either produce the required product for the customer directly or replenish the space left in a smaller inventory.
With these two methods in mind, let’s delve a little deeper into advanced strategies like MTS, MTO, and ATO that utilize push or pull manufacturing. We’ll explore each method’s, which advantages, disadvantages, and associated risks while showcasing an example product that suits each method.
1. Make to Stock (MTS)
Make to Stock (MTS) is a conventional production and inventory strategy where businesses manufacture a product and fill their inventory to match forecasted customer demand. In this strategy, production occurs before demand has been explicitly stated. Instead of receiving customer orders and manufacturing directly for each order, production and inventory levels are predetermined and sold according to the amount produced. Essentially this is a push manufacturing strategy.
Since the product has already been made, this production method enables businesses to immediately fulfill orders when they come. If customer demand is accurately determined, then MTS is a fast and effective production strategy. This is especially true for the customer as this will provide them with the desired product in the fastest method possible.
The inherent difficulty with this method is that forecasted demand is rarely an absolute certainty. Businesses have to invest a lot of capital into their production and inventory infrastructure before there is any promise of revenue. If the forecasted demand is off, the company has either overproduced - losing money - or underproduced - losing potential profit.
A well-performed MTS strategy is highly dependent on well-calculated estimations of product demand.
Despite the inherent risks of the MTS method, it is useful for enterprises that engage in mass production of products with low variability. With less differentiation between products, sales opportunities are more flexible as businesses can push their distribution to a wider customer base. Additionally, MTS is essential in cases where lead times need to be as short as possible.
MTS: Key Takeaways
- MTS strategy depends on matching production and inventory with forecasted demand.
- Products are produced prior to receiving the customer’s order. The order is completed by picking item from existing stock.
- Works best for low variety products where demand can be more easily forecasted.
- Advantages: Customer orders are pulled from existing pre-manufactured stock, enabling orders to be fulfilled instantaneously.
- Disadvantages: Significant upfront expenses developing inventory while adding the potential for underproduction or overproduction if forecasted demand is inaccurate.
- Example: Seasonal clothing requires fabrication prior to customer orders. To meet future market demand, clothing manufacturers will forecast demand based on past data and then produce according to the predetermined figures. Overproduced items are then sold at liquidation prices to deplete inventory and make room for newly produced items.
2. Make to Order (MTO)
As opposed to producing items to meet optimal inventory levels, companies that engage in the Make to Order (MTO) method only produce their product after the customer order has been received. This enables products to be engineered to the customer’s exact specifications while allowing the manufacturer to build the right amount based on actual current demand.
Instead of companies pushing a certain amount of product onto the market as we saw with MTS, customer demand pulls from production, which dictates how much is produced. In essence, production and demand are directly linked.
Companies engaged in MTO do need to invest in large inventories for 2 reasons:
- Components are fabricated and sourced separately depending on the amount that needs to be used. In theory, this is no more and no less than what is directly needed.
- Once completing the fabrication and assembly, the product is shipped immediately. This bypasses the need for a large post-production inventory.
The MTO method leads to low inventory costs and virtually zero risks of stock obsolescence.
Another advantage of MTO is that customers can acquire complete customization of their desired product. As with building a home or buying a vehicle, customers choose their options and the manufacturers build according to their specifications. This production strategy especially suits companies that produce products with high variability.
It is also beneficial for products that require a great deal of capital to produce. If you are building 50-foot cranes for use on a construction site, then you will most likely want an upfront investment before production begins.
The main disadvantage of this method is that the lead times are typically longer. Even though this method provides the most freedom and choice for the customer, it also means that it will take longer for them to receive the item since manufacturing only began when the order was received. This is less risk for the manufacturer but customers need to be prepared and adjust their pursuits around these longer lead times.
MTO: Key Takeaways
- Under MTO, products are only produced after the receipt of a customer order.
- Enables customers to purchase products that are customized to their exact specifications and demands.
- Works best for companies that build products with a high variety of customization or build expensive products that need significant investment before production can take place.
- Advantages: MTO enables complete product customization while enabling businesses to reduce inventory costs and wasteful activities like overproduction and underproduction.
- Disadvantages: Depending on the business, MTO items typically have longer lead times than other traditional strategies like MTS.
- Example: Manufacturers of aircrafts will only manufacture their products after orders and contracts are in place. The product is too expensive to begin production without an order and a secure investment in place.
3. Assemble to Order/Configure to Order (ATO/CTO)
Assemble to Order (ATO) - also known as Configure to Order (CTO) - is a production and inventory system where components and subassemblies of a final product are manufactured, but not yet assembled before the customer order is made. Only after the order is received does the company quickly assemble the product and send it out to the customer.
Fundamentally, ATO is the combination of both MTS and MTO strategies. This enables companies to perform the following functions:
- Raising the flexibility of MTO (Made to Order): Customers get to choose how their final purchased product is assembled. Although the options may be less extensive than the typical MTO scenario, customers still get to choose the features that fit their needs.
- Cutting down lead times like an MTS (Made to Stock): Since subassemblies are pre-manufactured, companies can quickly assemble the product once the order is placed. The initial bulk of production is already finished before the customer makes an order.
But ATO is not without its disadvantages. Like the MTS strategy, ATO requires a strong initial investment in producing and storing subassemblies - although there is no need to store the completed products in a post-production inventory. And like the MTO strategy, customers still have to wait for their customized product to be assembled - although this will be much faster than traditional MTO methods.
ATO is a powerful middle ground between push and pull strategies, effectively utilizing the strengths of other methods to the advantage of a specific product and business model.
ATO/CTO: Key Takeaways
- Assemble to order is a combination of Make to Order and Make to Stock.
- Products are produced quickly by assembling components (subassemblies) once the order is confirmed.
- The majority of expenses occur from producing and storing the different components, while the final assembly is relatively fast and inexpensive.
- Advantages: Ability to break down products into subassemblies, providing greater flexibility while also enabling a faster lead time.
- Disadvantages: Requires producing and storing the subassemblies which requires greater upfront investment by the manufacturer.
- Example: A personal computer distributor will already have all the required parts for a wide variety of final products. Once the order is made, then the computer will be assembled under the customer’s specifications.
Dynamic Strategies with Dynamic Instructions
When it comes to MTS, MTO, and ATO, there is no hard and fast rule about which is best to use. It is all dependant on your product and your business model. But standardization and process control are paramount to an effective strategy.
That is why our work instruction software is dynamic to your needs and capabilities, capturing a wide variety of process configurations that workers can quickly access and build. Switching to digital work instructions also helps to cut out the
8 wastes of Lean Manufacturing by helping you track your production data and transforming to meet your manufacturing needs.