Manufacturing companies are responsible for creating products to deliver to their customers. Of course, a production system needs to be in place to understand how much product needs to be made. Companies can choose from two inventory methods: build-to-order (BTO) or build-to-stock (BTS). Both are valid methods, yet how do they affect your enterprise resource planning (ERP) decisions? In this article we’ll compare the two methods and their relationship to ERP.
Build-to-stock, also known as make-to-stock, focuses on production before demand for the product is actually there. Without this demand, companies look to historical sales data and sales forecasts to estimate how much of their product to create. An easy way to remember BTS is to imagine a store with full shelves of product. The store is stocked with product even though customers haven’t bought anything yet.
Build-to-order, also known as made-to-order, focuses on production after the customer demands the product. Companies place less importance on historical and future sales data, as it will only fulfill orders that come through. An easy way to remember BTO is to imagine a small boutique store with little product on its shelves. The salesperson will only bring out the product the customer asks for.
Companies generally choose one method based on the type of good they produce. BTS is the production approach associated with the mass production of similar goods. BTO is the production approach associated with highly customizable or perishable goods. Knowledgeable companies know how to handle these fluctuations and plan far enough ahead to smooth out production over these periods of boom-and-bust.
BTS is a great choice for companies that specialize in a few products or products with little need for customization. Processed foods, textiles, and toys are common examples. Since companies focus on the same products year-after-year, they have reliable sales data to know how much product has sold in the past. This, coupled with forecasting, allows companies to estimate how much product to make throughout the year.
Since companies now know how much to produce, they can spread production evenly throughout the year. This comes in handy when preparing for seasonal demands like the holidays, where companies can ramp up production months in advance.
BTS also has it’s share of disadvantages. Forecasts are, after all, predictions. Lower-than-expected demand means companies will suffer losses on already-made goods. Higher-than-expected demand means companies will lose out on sales.
One of the great advantages of BTO is the ability to customize products to meet the needs and preferences of individual customers. This is ideal for higher-end and technological products like vehicles and laptops. Companies don’t have to worry about extra inventory, as they only fulfill orders that are placed. This makes them less prone to losses suffered from products that didn’t sell.
These advantages do come with trade-offs. With little product already made, it’s difficult for customers to walk into the store and purchase a product. Some may not want to sacrifice the wait time and instead turn to a product that’s available that day. Another disadvantage is price. Unlike BTS products, where mass production helps bring costs down, customizable products mean higher costs. This might turn away price-conscious customers who’d rather have a less customized product that still gets the job done.
BTS is also more susceptible to not meeting demand. Since products can’t be produced in advance, production lines can become strained around seasonal peaks. This can lead to missed sales and dissatisfied customers.
The production method your company chooses should align with the products made. Companies should take the same approach when working with their ERP system.
ERP systems should be able to provide detailed data to support sales forecasting efforts. Though sales forecasting relies on industry trends and seasonal factors, supporting ERP data can provide insight into the company’s particular circumstances. Strong systems must be able to take sales forecasts and convert them into readable data for production. Finally, ERP systems should be able to take total production goals and spread them out over time periods (e.g. month, quarter) to ensure smooth production.
With that being said, solid ERP systems must also be able to handle fluctuations in demand in the event that forecasts don’t align with real demand. Purchasing departments must be able to use sales forecasts to order the correct number of components to meet the upcoming demand.
ERP systems must have a strong link between the company sales order department and production departments. This ensures a consistent communication for creating the right specifications of a product. The ERP system must also be able to track and link individual orders to where they are in the production cycle. In today’s world where constant updates are the norm, companies can better communicate to customers the status of their orders.
For an ERP system to properly support BTO systems, there needs to also be a proper connection between the company sales order department and inventory management department. Since orders are built for customization, inventory managers need to know which parts are in high demand and when to order more. This is especially important during times of peak demand, where lack of components can halt production and hurt order turnaround times. On the flip side, this connection can also help inventory managers reduce stock on components with low demand, which can help keep costs down.
Before moving forward with any technology, it’s important to understand how it aligns with your company’s overall strategy and goals. How your company uses BTS or BTO is just one factor to consider. Will the chosen ERP system address the production and communication challenges your company faces? Do you have leadership with the experience necessary to oversee the transition to the chosen ERP system?
Solid ERP companies should be able to walk you through these questions. They should have a transition team and the support to train your company’s employees on this new way of doing things. The right ERP system unites production, purchasing, order management, and inventory. Only then can you truly maximize the potential of your production process.
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