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Types of Production Chapter 02

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24 views13 pages

Types of Production Chapter 02

Uploaded by

Babar Ijaz
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Different ProductionTypes

Lecture2
BBA7th
Classification by Type of Customer
Order
There are many production modes available and often the products or the market
(customer demand) will determine which mode is required for a manufacturer.

• Make to Stock (MTS)


• Make to Order (MTO)
• Assemble to Order (ATO)
Make to Stock (MTS)
Make to Stock (MTO) is used for high volume goods, commodified products,
consumables and other product types where consumers purchase the same version
of a product as a single unit or in bulk. It is a “push” production method used to
provide a steady supply and stock for retailers.

• Produce finished goods; customer buys from inventory


• Advantage: Smooth production
• Disadvantage: Inventory
MTS Performance Measures

• Service level (orders filled when requested)


• Inventory turnover (sales/avg. inventory)
• Back order fill rate
• Inventory accuracy
• Time to replenish
Make-to-Stock
Make to Order (MTO)
• Make to Order (MTO) is a manufacturing mode where production begins once an
order is received. It is a “pull” type production mode where demand in the form of
an order triggers production. MTO is used on goods where the order is a quantity
of one or a few and in situations where all or part of the order may be custom made
or carry a high unit cost. Many of the components and raw materials may require
sub processing or rendering before they find their way into the final product.
• Start production when customer orders.
• Advantage: No finished goods inventory
• Disadvantage: Intermittent production
Key performance measures
– Lead time
– Orders completed on time (or late)
– Quality measures
Make-to-Order
Assemble to Order (ATO)
•Assemble to Order (ATO) may follow many of the same steps as Make to Order.
However, in ATO, few, if any, sub-processes are required, and units are assembled
from completed components to make a whole unit.
•Make parts and subassemblies; finish when customer places order:

•Advantages: Less inventory, faster service


•Disadvantage: Some WIP inventory

Key performance measures


– Speed of service
– Inventory levels
– Quality of product and service
Assemble-to-Order
Advantages and Disadvantages of MTO
and ATO
• Advantages of MTO and ATO include:
• Cost – Because there is little to no safety stock set aside to produce volume
targets, and because the production environment does not require a large
amount of WIP, cost of MTO and ATO is lower than some MTO modes. MTO
and ATO environments require less cost in the form of raw materials
warehousing space and staff.
• Specialization – In MTO and ATO environments, orders can be made specific
to customer requirements.
• Finished Goods Inventory – In an MTO or ATO operation, orders produced
are already sold. This prevents the manufacturer from having to carry slow or
no-selling units. This impacts cost in the form of warehouse space and staffing
for finished goods. It also impacts cash flow and tax liability as no unsold units
are left to tie up valuable cash over time.
Disadvantages of MTO and ATO
• Low Supply – Since orders are produced as they are received, MTO and
ATO does not have a ready supply of units for purchase. In strong
seasonal demand or if a model or product becomes widely popular, the
lack of current availability may result in lost sales.
• Lead Time – As MTO and ATO are built on demand, lead times are
longer for products than in an MTS.
Best Practices for MTO and ATO
• To maximize the effectiveness of an MTO or ATO production mode, small to
medium manufacturers should adopt best practices to realize benefits. These
practices include things such as:
• Robust ERP/MRP System – Since MTO and ATO modes are triggered and
driven directly by sales orders, a robust ERP(Enterprise Resource Planning) or
MRP (Manufacturing Resource Planning) system is required. The platform
should have a strong linkage between its sales order and production planning
functionality.
• Materials Planning – MTO and ATO production modes are excellent for
perishables, custom production, production with high unit cost, and production
where materials are segregated and only used for the orders for one customer.
However, this doesn’t mean that all components are segregated.
• Cost – Modern ERP/MRP systems can roll up costs accurately for custom
orders. This accuracy allows managers to focus on process improvements in
measured labor, waste reduction, maintenance programs and others that will
help lower variable cost for the products.
• Scheduling and Planning – A strong scheduling and planning system
available through ERP and MRP systems will help plan production
schedules at optimum levels. For one, relying on common parts and
materials as mentioned in Materials Planning above will allow
consolidating or combining production orders within the production
workflow.

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