Make-to-Order (MTO) or Made-to-Order: Definition and Example

What Is Make-to-Order (MTO)?

The term make-to-order (MTO) refers to a business production strategy that typically allows consumers to purchase products that are customized to their specifications. As such, make-to-order is a manufacturing production process in which the production of an item begins only after a confirmed customer order is received. MTO is part of the pull-through production process, which occurs when companies produce goods based on actual consumer demand. It is common in certain industries, such as the aircraft and automotive industries.

Understanding Make-to-Order (MTO)

As noted above, make-to-order is a business strategy used by manufacturers to meet consumer demand. It means that a company only manufactures the end product once the customer places the order. While this creates additional wait time for the consumer to receive the product, it does allow for more flexible customization when compared to purchasing directly from retailers' shelves.

This strategy is a pull-through production or pull-type supply chain operation because products are only made when strong customer demand exists. This production model is commonly in the assembly industry where the quantity needed to be produced per product specification is one or only a few. This includes specialized industries, such as aircraft and vessel production, automotive, and construction among others. MTO is also appropriate for highly configured products such as computer servers, automobiles, bicycles, or products that are very expensive to keep inventory.

Here's how the MTO process works:

• The customer makes an order and a bill of sale is produced
• Once the order is confirmed, the company produces a work order
• The product is manufactured
• Delivery is made and the customer receives the order

Some companies adopt the MTO production system to manage inventory levels and provide their customers with increased customization. The MTO strategy relieves the problems of excess inventory that are common with other types of production strategies. Dell is an example of a business that uses the MTO production strategy, wherein customers can order a fully customized computer online and receive it in a couple of weeks.

Advantages and Disadvantages of MTO

Advantages

The main advantage of the MTO system is the ability to fulfill an order with the exact product specification required by the customer. If the company can deliver the product just as the customer wants, they are more likely to remain loyal to the brand.

Sales discounts and finished goods inventory are also reduced, and stock obsolescence is managed. As such, it ensures that companies can get full price for their goods. It also reduces waste and helps promote efficiency.

Disadvantages

One of the main drawbacks of make-to-order management is the timeliness of the customization process. If products are already on the shelf (as with MTS), then a customer doesn't have to wait until the product is made, assembled, and delivered to spec.

Cost is also a factor. Pre-made and available products are all alike and so manufacturing costs are lowered due to economies of scale. MTO, on the other hand, tends to be more expensive for the consumer since it involves customizable parts and finishes.

Make-to-Order (MTO) vs. Make-to-Stock (MTS) vs. Assemble-to-Order (ATO)

Make-to-Stock (MTS)

Traditional strategies produce products and stock them as inventory until a customer buys them. This is known as make-to-stock (MTS). Unlike MTO, which is meant to reduce waste and be more efficient, MTS may be prone to wastage and obsolescence as inventory sits on shelves waiting to be purchased. This problem is particularly acute in an industry like technology, where advancement is quick and the problem of obsolete inventory could quickly arise.

The MTS method is a theoretically great way for companies to prepare for increases and decreases in demand. However, inventory numbers and production are derived by creating future demand forecasts based on past data.

But, there is a high likelihood that the forecasts will be off—even if just slightly. This means that a company may be stuck with too much inventory and too little liquidity. This is the main drawback of the MTS method of production. Inaccurate forecasts will lead to losses, stemming from excess inventory or stockouts. Excess inventory can quickly become obsolete in fast-paced sectors like electronics or computer tech.

Assemble-to-Order (ATO)

MTO is similar to assemble-to-order (ATO). ATO is a business production strategy where products ordered by customers are customizable to a certain extent and produced quickly.

The ATO strategy requires that the basic parts of the product are not assembled. Instead, they are already manufactured and ready for use. Once an order is received, the parts are assembled quickly and sent to the customer. Costs vary in the ATO strategy where assembly costs are negligible while the cost of the components can be substantial.

This manufacturing process is common in the electronics industry, which involves computer production. Consumers and computer companies may design specific devices using customized components like monitors and keyboards.

Example of MTO

The MTO strategy is not suitable for every product or industry. Everyday goods and services, which are meant for mass consumption, are not manufactured in an MTO process. Because of the intricacies and costs involved, MTO tends to be used in certain specialized industries, including:

• Aircraft
• Automotive
• Construction
• Computers
• Fashion
• Furniture

MTO is very common in property development. Many real estate developers buy large plots of land and sell them to consumers. Builders allow home buyers to make customizations in the design and construction of their homes. This includes floor plans, architectural designs, and the use of fixtures. For instance, companies like Pulte Homes offer customized homes in many states across the U.S.

The Bottom Line

Most of the goods and services we use each day are meant for mass consumption. But, if you have the money, you can procure products that are manufactured in the make-to-order process. This involves customizing goods according to a consumer's needs. Things like airplanes, homes, high-end fashion, cars, and computers may be made to the unique specifications of consumers. While it can help companies make more money and reduce waste, it often costs more. And consumers must wait longer to have their orders fulfilled.