Make-to-stock is a production approach that matches production with anticipated consumer demand to minimize inventory costs. Accurate demand forecasting is crucial, and businesses can minimize expenses by adjusting raw material purchases and labor scheduling. However, inaccurate demand forecasts can lead to lost sales or high inventory costs.
Make-to-stock is a type of production approach that seeks to match the pace or rate of a production line with anticipated consumer demand for those products. The idea is to use demand forecasts to define production schedules and generate enough product to meet these needs, without stocking large quantities of finished products in warehouses. If successful, a make-to-stock strategy makes it easier to control costs and minimize the taxes the company pays on finished goods held in inventory.
The efficiency of using a make-to-stock method rests on accurately forecasting consumer demand. That means looking closely at a number of relevant factors. An accurate projection will consider historical data that identify changes in demand based on seasonality or certain events occurring in the economy. These findings will be kept in mind when assessing the potential for these events to occur in the next production period. For example, if historical data indicated that consumers purchased twenty percent less of a particular product during a recessionary period and there is evidence that a recession is imminent, the manufacturer can adjust production quotas downward to match the forecast decrease. on demand.
Businesses are able to minimize a range of expenses using the make-to-stock concept. The purchase of raw materials is carried out based on projections. If demand is forecast to drop for a certain period, the company may choose to reduce the amount of raw materials held on hand and also reduce production hours. At the same time, an anticipated increase in demand may require additional raw materials to be purchased, which may generate some savings based on the volume of these purchases. The company can also utilize the most cost-effective means of scheduling additional labor into the production process, which in turn helps keep the rate of return for each unit produced within a reasonable range.
While a make-to-stock approach can be extremely beneficial when demand forecasts are accurate, this strategy can be devastating if those forecasts are false. The company may face an influx of orders that cannot be filled within a reasonable amount of time, causing customers to seek out a competitor’s services. At the same time, an inaccurate projection involving an increase in demand can lead to a huge inventory of finished goods that incurs a much higher tax liability.
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