Build to Order or Build to Forecast

�Build to Order’

OR

�Build to Forecast’?

Prepared by: Shivali Bhargava

Table of Content:

• Introduction

• Build to Forecast Model

• Build to Order Model

• Transformation of Manufacturing

• Industry examples

• Cost Benefit Analysis

• Trend

• Exhibits

Introduction:

The evolution of modern manufacturing began with the assembly line era wherein inventories sourced from varied suppliers and manufactured products at their shop floor purely on the basis of demand forecasting based on prior years sales and emerging market trends. The industry has long worked upon this model and has achieved a fair bit of precision in estimating demand. However, in the last decade and half, the manufacturing has been slightly tweaked to produce goods as and when and as and how the customers want it. As of today, most of operations management research characterizes production on system as either Build to Order (BTO) or Build to Forecast (BTF). The former typically offers customer-specific and more expensive products, wherein the focus is on order execution. The main performance measures are average response time, average order delay etc and the priority is shorter delivery lead-time. Operationally speaking, the issues primarily are capacity planning, order acceptance/rejection, and high due date adherence.

On the other hand BTF systems have been traditionally offered a low variety of producer-specified and typically, less expensive products. The main operations issues for the system are inventory planning, lot size determination and demand forecasting. The performance measures basically line item fill rate, average inventory levels.

There is consistent buzz in the industry about the relative pie of the market that each of the models will be able to carve out. The current situation is heavily biased towards the BTF model which has traditionally been followed. However, the mindset of manufacturers is slowly twisting towards the BTO model as well as a combination of BTO-BTF model. The trend has been observed across industries and the benefits of each model are backed by a fair share of defaults. Dell is one classic example of the companies that follow the BTO model, which is now emulated by firms across the PC manufacturing.

Evolving characteristics of Manufacturing Industry

• The industry is moving towards building smart processes and undertaking high learning experiences

• There is a lot of weight laid upon flexibility and agility to manufacture products

• The companies are going global, hence sourcing from varied suppliers and supplying to different countries

• The companies work with virtual factories, having outsourced most of their products to nearby located suppliers

Made to Stock (MTS) вЂ" Build to Forecast Model

The made to stock model is the traditional model where in firms manufacture products and stock them to sell them at a later stage. This model follows varied forecasting techniques based on the past trends and futuristic predictions. However, if the demand dies down due to recession or availability of other alternate products, these companies stand to lose heavily on the parts currently in stock. Also, the holding costs of products in warehouses are immense in this case and so is the working capital requirement.

This model is still widely followed by automotive sector and other large industries such as steel, pharmaceuticals and others. However, in each sector there are signs of wavering to the other model i.e. the MTO вЂ" Made to Order.

Given the demand parameters for standard and custom products, the operations model next determines the type and level of capacity to acquire, and whether to operate in MTS or MTO fashion. Capacity comes in two forms: efficient capacity which can only produce standard products in MTS fashion, and flexible capacity which can produce either standard or customized products and can operate in either MTS or MTO fashion. That is, efficient capacity is associated with lower costs from a relatively steady production schedule for a limited set of product configurations, where output is added to inventory. Flexible capacity, on the other hand, is associated with resources that can produce multiple product configurations on relatively short order and need not run at stable output, but is subject to a capacity constraint. The efficient and flexible capacities have different fixed and variable, per-unit costs.

Made to Order (MTO) вЂ" Build to Order Model

Build-to-Order is the capability to quickly build standard products after receiving orders without forecasts, inventory, or purchasing delays. These products are then shipped to individual customers, to stores or dealers, or as a response to assemblers’ orders.

The basic strategies for implementing Build-to-Order are:

1) Supply chain simplification:

The simplification steps for supply chain management are:

• Standardization of products

• Automated supply techniques

• Rationalization of the product line - To eliminate/outsource low-volume products.

The goal of supply chain simplification is to drastically reduce the variety of parts and raw materials to the point where these materials can be procured spontaneously by automatic techniques. Reducing the part and material variety will also shrink the vendor base, further simplifying the supply chain.

2) Part variety reduction:

The