Make-to-stock vs. Make-to-order (Push vs. Pull)
Summary
TLDRThis video script explains the two main types of production planning: make-to-stock and make-to-order. The make-to-stock system produces goods before demand, based on forecasts, aiming to minimize shortages but potentially increasing inventory costs. In contrast, the make-to-order system builds goods only after receiving orders, reducing inventory costs but requiring higher capacity and shorter lead times. The script also introduces push and pull systems, highlighting the advantages of just-in-time production, which minimizes waste and work-in-process inventories by synchronizing production with actual demand.
Takeaways
- 📦 The make-to-stock system builds goods before demand is realized, relying on forecasts and storing items until sold.
- ⏳ Make-to-stock is ideal when processing lead times are long, capacity is limited, or product variety is low, minimizing stockouts.
- 💡 The make-to-order system produces goods only after demand is realized, reducing holding costs and risks by eliminating excess inventory.
- ✂️ A service factory, like a barbershop, is always make-to-order, as services cannot be stocked in advance.
- 🔄 Make-to-stock is a 'push' system, producing and pushing inventory down the supply chain regardless of demand, while make-to-order is a 'pull' system driven by actual demand.
- ⚙️ A variation of make-to-stock, known as make-to-bottleneck, synchronizes production with the bottleneck, reducing work-in-process inventory.
- 🚗 The push-pull hybrid system is used when upstream processes create low-variety parts at high capacity, while downstream processes produce high-variety finished goods.
- 🛠 A full pull system, or just-in-time system, produces only according to demand, minimizing both work-in-process and finished goods inventories.
- 📊 The Kanban system uses signals (Kanban cards) to trigger production in a pull system, ensuring each workstation only produces what is needed by the next process.
- 🔧 The main weakness of a just-in-time system is low capacity utilization, but this can be addressed by redesigning processes to balance cycle times and meet demand rates.
Q & A
What is the difference between the Make to Stock and Make to Order production systems?
-The Make to Stock system produces goods before demand is realized based on capacity or forecasts, while the Make to Order system produces goods only in response to actual demand.
In what situations is the Make to Stock system ideal?
-The Make to Stock system is ideal when processing lead times are long, capacity is limited, there is little or no variety in output (such as commodity products), or the value of finished goods is very low.
What are the main advantages of using the Make to Order system?
-The main advantages of the Make to Order system are reduced holding costs and lower risk, especially when lead times are short, capacity is high, output variety is high, or the value of finished goods is high.
Why is a service factory, like a barbershop, considered a Make to Order system?
-A service factory like a barbershop is considered a Make to Order system because it cannot produce services (e.g., haircuts) in advance. Services are provided in direct response to customer demand.
What are the drawbacks of a Make to Stock system when demand is overestimated?
-When demand is overestimated in a Make to Stock system, companies face the risks of obsolescence costs and holding costs due to overstocked inventory.
How does the Push system relate to the Make to Stock system?
-The Push system is another name for the Make to Stock system, where prior processes tend to overproduce and push their outputs to the next process, often producing more than the demand rate.
What is a Pull system, and how does it relate to the Make to Order system?
-A Pull system, also known as the Make to Order system, ensures that every process only starts production when demand from the next process or the customer triggers it. This minimizes inventory and aligns production with actual demand.
What is the Push-Pull hybrid process, and in what situations is it useful?
-The Push-Pull hybrid process combines elements of both Make to Stock and Make to Order systems. Upstream processes produce based on capacity or forecasts, while downstream processes produce based on actual demand. It's useful when upstream processes handle low variety, high-capacity production, while downstream processes require more customization.
What is the Just-In-Time (JIT) system, and how does it minimize waste?
-The Just-In-Time (JIT) system, also called the Kanban system, ensures that every workstation only produces when pulled by demand from the next workstation, minimizing work-in-process and finished goods inventory, which are considered waste.
What is a major limitation of the Just-In-Time system, and how can it be overcome?
-A major limitation of the Just-In-Time system is low capacity utilization, as stations may produce less than their capacity. This can be overcome by redesigning the process so that all stations' cycle times match the demand rate (T-time), leading to balanced production.
Outlines
📦 Make-to-Stock vs. Make-to-Order Production Systems
This paragraph explains the two primary production systems: Make-to-Stock (MTS) and Make-to-Order (MTO). MTS produces goods before demand materializes, typically based on capacity or forecasts, which often exceed current demand. This system is useful when lead times are long, capacity is limited, or there is little product variety, as seen in low-value products like nuts and bolts. MTO, on the other hand, produces only when actual demand exists, minimizing holding costs and risks. It is ideal for businesses with short lead times, high capacity, and high-value or high-variety products. The paragraph also mentions how systems should adapt as processes evolve, and introduces the terms 'push' (MTS) and 'pull' (MTO) to describe how inventory moves through the supply chain.
🚗 Hybrid Push-Pull Systems in Complex Production
This paragraph discusses the push-pull production system, a hybrid model combining elements of both Make-to-Stock (push) and Make-to-Order (pull). It describes scenarios where upstream processes with high-capacity machines make standard parts, while downstream processes handle high-variety, labor-intensive assembly, as seen in car manufacturing. The upstream stations push products based on capacity, while downstream stations pull according to demand. From a customer’s perspective, the entire system might appear Make-to-Order, even though there are internal differences in how production is handled between the two stages.
Mindmap
Keywords
💡Make to Stock
💡Make to Order
💡Lead Times
💡Capacity
💡Variety
💡Holding Costs
💡Push System
💡Pull System
💡Just in Time (JIT)
💡One Piece Flow
💡Kanban
💡Capacity Utilization
Highlights
Introduction of two types of production planning: Make to Stock and Make to Order systems.
Make to Stock produces goods before demand is realized, based on forecasts or capacity.
Make to Stock system helps minimize shortages and stockouts when processing lead times are long or capacity is limited.
Make to Order system builds according to actual demand, which reduces holding costs and risk.
Service factories, like barbershops, operate as Make to Order systems, as they cannot stock up on services in advance.
Push and Pull systems correspond to Make to Stock and Make to Order systems respectively.
Make to Stock (Push system) often leads to overproduction, pushing inventory down the supply chain.
Make to Order (Pull system) only starts production when demand or the next process calls for it.
A hybrid system, Push-Pull, can combine Make to Stock for upstream processes and Make to Order for downstream processes.
Upstream processes in complex manufacturing (e.g., car parts) benefit from Make to Stock, while downstream processes benefit from Make to Order.
In a pure Make to Order system, production only happens when demand exists, eliminating work-in-process and finished goods inventory.
Just-In-Time (JIT) is a type of Make to Order system where production occurs strictly based on demand and involves minimal inventory.
Kanban system ensures every workstation produces only when required by the next workstation, using signals to control the process flow.
One-piece flow or Kanban system minimizes work-in-process and finished goods inventories, aiming for lean production.
The main weakness of the Just-In-Time line is its low capacity utilization, as it produces strictly to meet demand.
Transcripts
to complete our process analysis we
shall learn the two types of production
planning the make to stock and the make
to order
systems the make to stock method of
production produces before demand is
realized or before orders come in this
system builds Goods based on capacity or
forecasts which more often than not are
greater than current
demand this is the reason stocks are
made only to be stored and hopefully
sold at some future date what are the
major reasons to use the make to stock
system when processing lead times are
long when capacity is limited when
there's little or no Variety in output
requirements as in commodity
products and when the value of finished
goods are very low
as in nuts and
bolts if your process is either one of
the first two conditions the make to
stock system will minimize shortages and
stockouts when real demand
arrives if if you have the third or
fourth condition you won't be heavily
penalized with obsolesence cost or
holding cost respectively in case you
over
stock the make to order system builds
according to actual demand orders
booking or t time as we have learned
earlier in theory this system won't
produce stocks as all outputs are
consumed or sold immediately or in a
very short period of time if you have
short lead times high capacity high
output variety or high value of finished
goods you would want to adopt the make
to order system to minimize your holding
cost and
risk a service Factory is always a make
to order System since you can stock up
customers barber shops can't produce
haircuts in advance your system needs to
adapt as your process changes over time
for instance as you cut lead times and
improve capacity you may want to switch
from make to stop to make to order to
reap the full benefits of your process
and productivity
improvements also as product variety and
value added increase when you move up
the value chain or value stream you're
better off with a make to order system
nowadays you may also hear about push
and pull systems these are nothing but
fancy easy to remember labels for our
make to stock and make to order systems
the make to stock is the push System
since all prior processes and
workstations including suppliers tend to
overproduce and push their outputs to
the next
process every process seems to be
pushing inventory down the supply chain
producing according to its capacity
mindless of the T time or take up rate
of the next
process conversely the make to order
system is a pull System since every
station doesn't process or start
processing unless pulled by demand or by
the next process everybody's pulling
everybody else down the line like a
train let's now try to visualize our two
production systems let's start with our
original five station process with their
capacities indicated here suppose demand
is 10 units per hour let's see I make
the order stock case in which everyone
tries to produce according to their
capacity see what happens to their
actual or throughput
rates this system which we shall call
make the capacity will create costly
work in process and finish goods
inventory at the end of the line a make
to capacity system often assumes a
sell's Market a build it and they will
come
environment A variation of the make to
stock system which is somehow better is
one in which everybody synchronizes with
the bottleneck as shown here at steady
state this make to bottleneck process
will produce only finished goods stocks
but not work in
process note that both systems will be
producing more than the demand rate of
10 let's now see how our process would
behave on a make to order basis under
the same
conditions there are two ways to
actually meet the exact demand or orders
the first is what I call the pushpull
process here every process produces the
capacity or plans based on forecast
except the last process or processes
which produce based on actual demand or
t
time there are no finished goods
inventory as goods are immediately
delivered or sold just in time
this can be considered a hybrid just in
time system with just in time delivery
but without just in time production
since work in process inventories are
created in the Upstream processes here
the Upstream stations are pushing with
their capacities but the downstream
stations are being pulled by the
market now why would anyone want to do
this complex production for instance
you're making cars or something similar
your Upstream processes may be
high-capacity machines making low
variety standard Parts like prees
stamping uniform metal brackets but your
Downstream processes are lower capacity
labor intensive assembly processes that
make high variety car
models according to our previous slides
the first half of your factory would be
better off making to stock while the
second half better off making to order
from the customer's point of view
however this may seem like a pure make
to order System since he doesn't see nor
care about what you do in your back
office now let's consider a completely
pull make to order
system here as you can see everyone
produces according to the demand rate of
10 or t time and not according to its
capacity or the process
bottleneck notice that there are no work
in process nor finished goods invented
in this
system let's take a look at a pool line
or just in timeline in detail it is a
special type of make to order system in
which all workstations not just the last
one is strictly produced according to
the T time here a workstation will only
produce and deliver only if required or
pulled by the next workstation also
referred to as its internal customer
ideally the parts or raw material
supplier of adjus In Time process also
delivers inputs according to T time
thejus in Timeline is also known as the
one piece flow Lin system or Canan
system it is one piece flow since there
is only one piece or one small batch
between each station at any
time since it minimizes if not eliminate
work in process and finished goods
inventories adjusting timeline is also a
lean system if we consider all forms of
inventories as waste and
unnecessary why call it a Canan system
the Japanese term Canan means a sign
board in adjusting timeline it refers to
the physical or electronic signal a
station sends to its prior station which
tells it to start producing or
delivering the next unit the can band is
a sort of internal purchase order
one receives from its internal customer
the canand effectively controls the
process flow in a just in time line and
ensures every station Works according to
T or the requirements of its next
process any line balance or unbalanced
can be converted from a push to a pull
or just in
Timeline one criticism or weakness of
adjusting timeline as you may have
observed is its low capacity
utilization more often than not as it
produces the
demand most if not all processes and
stations will produce less than their
capacities including our former
bottleneck station
C the way to get around this weakness is
to redesign your process or create a new
one such that the line is balanced and
every station cycle time matches the T
time in other words the throughput rate
of each station is its
capacity direct labor utilization will
be
100% and work in process and finished
goods inventory are virtually
eliminated the balance just in Timeline
will be the least cost process
configuration
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