We hear executives talk about lots of different finished goods strategies, but in our experience, they really all boil down to just two methods:
- Make-to-stock Lean manufacturing Lean manufacturing
In make-to-stock, when a customer places an order, that order goes to your warehouse and a stock picker picks the stock and arranges for it to be shipped to the customer.
At some point after that, a signal is sent to production planning to replenish the stock that has just been sold.
The normal situation for a make-to-stock item is that it is available in stock. If it is out of stock, there is a risk that the customer will order the product and your business will be unable to deliver. Lean manufacturing
Therefore, a make-to-stock item with no stock on hand is a problem that must be addressed.
In make-to-order items, when a customer places an order, production planning sends the order to production and they make exactly what the customer needs in the quantity the customer specifies.
The production order triggers purchasing or picking of parts or subassembly delivery to the assembly department. In either case, I would consider this make-to-order production. The completed order is then shipped to the customer.
The normal situation for make-to-order is that there is no stock of the product in the warehouse, apart from the stock that is being staged prior to shipping for a current order. Lean manufacturing
Lean manufacturing Finished good strategies
If there is stock in the warehouse of a make-to-order item, it is very likely that this stock will never be sold (because it is usually unique to one customer and often unique to one order). Any leftover stock for make-to-order items is a problem that must be addressed.
I often observe companies mixing up their finished goods strategies. These companies often accumulate large amounts of obsolete stock of make-to-order items that are never ordered again.
Then in the same warehouse, they will run out of stock of other items that customers expect to order off-the-shelf.
It is rare that I find a company where all their products fit within one finished goods strategy. Most businesses have a mix of both strategies.
However, as a general rule, businesses that have a standard range of products they market and sell (such as fast-moving consumer goods manufacturers) will tend to keep their range in stock.
On the other hand, manufacturers of customized products such as boat builders (or jobbing manufacturers such as sheet metal shops and packaging manufacturers) tend to produce make-to-order products. A key determinant is the customer’s expectations of service.
For example, if your customer expects next-day delivery but your production process takes 2 weeks, you will probably need to hold stock unless you can find a way to reduce your lead-time to 1 day.
On the other hand, if your customer expects a customized product and is prepared to wait 8 weeks (as an example, a new piece of machinery or a structural steel component for a building), you are most likely to make-to-order.
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