Is there a golden mean to assure the satisfaction of both the custumer and the company?

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Is there a golden mean to assure the satisfaction

of both the customer and the company?

By Alexander Murby

How hybrid make-to-order – make-to-stock (MTO/MTS) manufacturing

policies can help align your production and planning control strategy; to meet

customers’ demands for shorter lead times.

Can companies benefit from applying the theory of hybrid MTO/MTS manufacturing policies? The answer is; yes. Applying the theories and methods associated with hybrid manufacturing on a case company that expressed having unclear scheduling and inventory policies showed that it was possible to identify a strategic inventory position located in the middle of the production chain, where a relatively small number of the case company’s broad product flora could be held as inventory. These few identified products, approximately 2.8 per cent of the complete product flora, represented a large part of the total volume produced, approximately 27 per cent. With the introduction of a stochastic inventory control method, a possible reduction in customer lead times would be achievable. This resulted specifically in a total reduction of consignment held inventory. Hence, a possible outcome, if the suggestions based on the analysis at the case company are implemented, is the reduction of lead times to customers, with a lower cost from tied capital, and a more suitable scheduling policy.

The theory of hybrid MTO/MTS manufacturing polices suggest that a company can operate in an environment where customers demand both short lead times as well as a high degree of customization. Traditionally these two requirements are often hard to fulfil, satisfying one of them usually means having to give up on the other. A higher degree of customization means longer lead times for the customers and the products are often produced based on an order, where the customer can choose among a multiple amount of products and customization of them. When the need of short lead times are important for the customer, a company can choose to make these products to stock instead, and the demand estimated on a prognosis, a forecast driven production. How should a company behave if they find themselves operating in such an environment where customers require short lead times and a high degree of customization, with varying demand patterns, stretching from low volumes with high variability in order frequency to large volumes with low variability in order frequency. It is often not economically defendable to keep all the different products on a shelf (a finished goods inventory) since the demand is too uncertain and the risk of producing products that will never be sold is too high. Not all the customers value the same things equally high either, for some, the level of customisation is more important than the short lead times. Whichever it is, it presents a problem to the company. How should the company prioritise which orders are more important? Should some be made to stock when there is free capacity, what scheduling policy should they follow, should some products be prioritised over other products. Another solution could be to make everything based on an order, offering the same lead-time to all its customers. However, this is probably not the most profitable method, since the customers’ requiring short lead times might then look for other suppliers. Does a company have to choose one of the two, make everything to stock, or to order, or is there a possible middle way.


These kind of questions are difficult to address with the classical manufacturing polices: engineering to order (ETO), make to order (MTO), assembly to order (ATO), and make to stock (MTS). If the questions are not addressed, the company risk not being able to satisfy any of their customers’ needs, neither the ones requiring short lead times nor the ones with need of high customization. The company in itself ends up in a position of high uncertainty in how to best strategically align the production system. Should the focus be on high capacity utilization or high flexibility to deal with varying customer demands? This can result in having a misalignment between the production system and its planning and control strategy, compared to the market’s demand characteristics.

As a middle way, a combination of MTO/MTS can be used, where the company can reap the benefits of the two policies. The MTO policy that offer the ability to be responsive and flexible to volatile demand and high product variability. Whereas the MTS policy is of interest due to properties dealing with high capacity utilization and the reduction of lead times to customers. Intermediate and finished goods inventories are applied simultaneously, for different product groups. Decoupling points (DP) are applied to differentiate where in the production chain the products stop being produced according to a forecast and become customer driven.

Applying the hybrid MTO/MTS manufacturing policy could be a solution for companies finding themselves in this market environment. Where an analysis of the customers’ demands could be performed, segmenting the customers based on their requirements will reveal opportunities. With a demand patterns analysis for each segment focusing on identifying products that could be suitable for a MTS-policy based on the demanded volume and order frequency. Furthermore, if any products are identified as candidates to a MTS policy, primarily if the demand can be forecasted. An analysis could be performed to determine if they can be produced as a single unique product up to a certain point in the production chain before they become customized. This then becomes a point of interest in the production chain, where some of the products could be produced according to the MTS-policy, enabling a shorter lead time of these products to the customers. This is what was done at the case company, clearly showing that the hybrid MTO/MTS policy can be useful in lowering the lead time to certain customers, as well as helping to establish planning and inventory policies better aligned to the market characteristics. The research at the case company further helped expanding the already existing theories and literature on hybrid MTO/MTS manufacturing policies in multiproduct manufacturing companies.

Inventory Control in a Hybrid Make-to-order – Make-to-stock Multiproduct Manufacturing System.

Lund University

LTH, Faculty of Engineering





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