“Build to stock” is a production system where products are made on a fixed schedule, rather than in response to demand. It is suitable for predictable or seasonal demand and when there are economies of scale. Fast food restaurants also use this approach during busy times. The alternative is “build to order,” which has no unsold inventory but has a delay between purchase and availability. Most manufacturers use a combination of both. Automotive manufacturing is an example of a hybrid approach.
“Build to stock” is a production system whereby stock is produced on a fixed schedule, rather than in response to demand. In some cases, building to store can literally mean producing enough units to fully stock the capacity of the warehouse. In other cases, it may simply mean building a fixed number based on anticipated demand.
There are several situations where this system may be appropriate. One is where product demand is highly predictable or has a seasonal element. For example, a Halloween costume company may produce a fixed number of costumes in the run-up to Halloween, rather than waiting until the end of October to see if demand increases.
Another situation suitable for build to stock is where there are significant economies of scale for the continuous production of the same product. For example, a factory using molding can incur high costs each time it switches from one product to another, as it will have to change molds. It therefore makes sense to produce as many units of a product as it can stock rather than switching back and forth in line with short-term demand.
While most of the examples involve long-term storage of products, there are exceptions. A fast food restaurant, during busy times, will often cook as many items as possible, rather than waiting for an order. This is because the potential cost of having unsold inventory left over, taking into account both the actual cost and the likelihood of this happening, is less than the potential loss of business if production delays cause a backlog and discourage customers.
The contrasting approach to build to stock is to build to order. This means that all or part of the stock is only produced after a firm order has been placed. The benefit is that there is no chance of being left with unsold inventory or unnecessarily clogging up a warehouse. The downside is that there is an inherent additional delay between a customer deciding to make a purchase and the availability of merchandise.
Most manufacturers use a combination of build to stock and build to order. This may concern both the quantities produced in the different periods of the year and the production process itself. One of the most notable instances of such a hybrid approach is in automotive manufacturing, where the vehicle chassis may be manufactured in bulk on a build to stock basis, but the final car is built to order once a customer makes customization choices .
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