Make-to-stock vs. Make-to-order (Push vs. Pull)

Summary

This 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

00:00

📦 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.

05:01

🚗 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.

Keywords

💡Make to Stock

Make to Stock is a production method where goods are produced in advance based on forecasts or capacity, before actual demand is realized. It's used when lead times are long or when there's limited capacity. In the script, it's mentioned that this system is suitable for commodity products with little variety and low value, such as nuts and bolts, to minimize shortages and stockouts when real demand arrives.

💡Make to Order

Make to Order is a production system where goods are produced only after an order is received or demand is realized. This system is ideal for situations with short lead times, high capacity, high output variety, or high value of finished goods to minimize holding costs and risk. The script uses a service factory and barber shops as examples where products or services cannot be produced in advance.

💡Lead Times

Lead times refer to the time it takes from the initiation of a production process to the delivery of the finished product. The script explains that long lead times are a reason to use the Make to Stock system to ensure products are available when demand arises.

💡Capacity

In the context of the script, capacity refers to the production output potential of a system or process. It's mentioned that when capacity is limited, the Make to Stock system can help to ensure that production meets future demand.

💡Variety

Variety in output requirements refers to the range of different products or types of products that a production system can produce. The script suggests that when there is little variety, as with commodity products, the Make to Stock system is more suitable.

💡Holding Costs

Holding costs are the expenses associated with storing inventory, such as rent, insurance, and potential obsolescence. The script explains that the Make to Order system helps to minimize these costs by producing only what is demanded, reducing the need for inventory storage.

💡Push System

A Push System, also known as Make to Stock, is characterized by producing goods based on capacity and pushing them down the supply chain, regardless of current demand. The script describes how in a Push System, workstations tend to overproduce, leading to inventory buildup.

💡Pull System

A Pull System, also known as Make to Order, is where production is triggered by actual demand or orders. The script illustrates that in a Pull System, each station only produces what is needed, as signaled by the next process in the line, thus reducing inventory.

💡Just in Time (JIT)

Just in Time is a production strategy aimed at reducing inventory costs by producing goods only as they are needed. The script mentions a hybrid JIT system where upstream processes may produce to capacity, but downstream processes produce according to actual demand.

💡One Piece Flow

One Piece Flow is a lean manufacturing technique where products are produced and moved through the production process one at a time, or in very small batches. The script refers to this as the Just in Time Line or Kanban system, which minimizes work in process and finished goods inventory.

💡Kanban

Kanban is a scheduling system used just-in-time manufacturing and inventory control. In the script, it is described as a signal from one workstation to another indicating the need for more product, effectively controlling the flow of production.

💡Capacity Utilization

Capacity Utilization refers to the extent to which a company is using its productive capacity. The script points out that in a Pull System or Just in Time Line, capacity utilization might be lower as production aligns more closely with actual demand rather than potential capacity.

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