Over the past few years, warehouse and inventory management have undergone significant evolution. The integration of increasingly advanced warehouse management systems and task automation has accelerated operations and reduced errors. Despite these advancements, one crucial question remains: which items should be kept in inventory, and which should be produced or purchased on demand?
At the heart of this dilemma lies two approaches. Make to Stock (MTS) relies on forecasts based on sales history and demand prediction models to produce or order goods in advance.
This method ensures immediate availability and allows for economies of scale, but it carries the risk of overstocking, tying up capital, or on the flip side, high risks of stockouts and customer dissatisfaction. Conversely, Make to Order (MTO) and Buy to Order (BTO) models initiate production or purchasing only upon receiving an order. This minimizes storage costs but results in longer delivery times and a dependency on suppliers.
The decision depends on several criteria:
Product Criticality: In the healthcare sector, storing ventilators, whose delivery can take several months, is essential, regardless of cost.
Perishability: A florist selling hundreds of roses weekly cannot store them for more than a few days without compromising freshness and perceived value. This requires a replenishment frequency aligned with actual demand.
Minimum Order Quantity (MOQ) & Available Space: High minimum order quantities or low-turnover products can occupy valuable space unnecessarily, wasting capital and generating high storage and maintenance costs.
Customer Satisfaction: A product that is immediately available strengthens customer trust and appeal, whereas made-to-order products allow for customization but increase lead times, which can result in dissatisfaction and loss of market share.
However, it’s not just a matter of stock or no stock. Other approaches add nuance to the spectrum, such as Assemble to Order (ATO) and Dropshipping (DS). ATO is based on prefabricating components and assembling them upon receiving a customer order. This saves space and time (components are smaller and easier to handle than finished goods), allows for better product modularity, but still requires additional resources for final assembly upon order.
Dropshipping involves full outsourcing of inventory to the supplier, eliminating storage costs entirely. However, this often increases shipping costs, reduces margins, and is highly dependent on supplier reliability, feasibility, and lead times.
Conclusion:
In conclusion, the decision to stock or produce on demand boils down to an analysis of costs, lead times, and customer satisfaction impact. This is not merely a logistical issue but a strategic one where every parameter must be considered. This ongoing debate in professional circles clearly illustrates how strategic choices can influence a company’s competitiveness and responsiveness.
About Avalon CSC:
With its expertise, Avalon CSC is equipped to support you in evaluating these inventory strategies and the implications of different solutions by:
- Defining Tailored KPIs: We establish and track relevant indicators such as turnover rate, service level, coverage rate, and holding costs to accurately measure performance and manage stock evolution.
- Segmenting & Classifying Demand: We categorize SKUs according to their financial and operational impact, identifying critical flows and focusing efforts on the most strategic items.
- Simulating Strategic Scenarios: We model the impact of various approaches (MTS, MTO, ATO, DS) on total costs, lead times, and customer satisfaction to identify the most profitable and suitable solution for your industry.
