What it means
In a build to order model the customer's order is the trigger for production, so the factory makes exactly what has been sold and nothing more. Components and raw materials may still be held in stock, but finished goods inventory sits close to zero.
The financial appeal is working capital, meaning the cash tied up in day to day operations. Money that would otherwise sit in a warehouse as unsold stock stays in the bank, and the risk of writing off product that has gone out of date largely disappears.
It also shifts the cash cycle in the seller's favour, because many build to order businesses take a deposit or full payment before production starts. In effect, customers fund the build rather than the company borrowing to do it.
The trade-off is lead time and lost sales. A buyer who wants the item today will go elsewhere, so build to order suits configurable, high value or personalised products where waiting is acceptable, and suits everyday commodity goods badly.
Most real businesses sit somewhere in the middle, in a model often called assemble to order. Standard modules are held in stock and only the final configuration waits for a customer, which keeps lead times to days rather than months while still avoiding a warehouse full of finished variants.
In practice
Real-world examples.
Example
A bespoke bicycle brand takes a 50% deposit at the point of order and builds each frame to the rider's measurements over six weeks. It carries tubing and components but no finished bikes, so a change in fashion costs it a redesign rather than a warehouse of unsellable stock.
Example
A commercial furniture supplier switches its boardroom table range to build to order after discovering that 40% of finished units were being discounted to clear. Lead times move from three days to four weeks, and the sales team responds by quoting delivery dates at the point of quotation rather than promising immediate despatch.
Example
A specialist electronics firm keeps populated circuit boards in stock but assembles final units only against orders. That hybrid lets it quote a five day lead time while holding a fraction of the finished goods inventory its competitors carry.
Think of it
“Build to order means making products only when ordered-no building for inventory.
Formula
Calculation
Annual inventory holding cost = average inventory value x annual holding cost rate
The holding cost rate covers warehousing, insurance, obsolescence and the cost of the capital tied up, and commonly falls somewhere between 15% and 30% a year.
A cabinet manufacturer running a build to stock model carries average finished goods inventory of $1,800,000 and applies a holding cost rate of 22%. Its annual holding cost is $1,800,000 x 0.22 = $396,000.
After moving to build to order, average finished goods inventory falls to $450,000, so the holding cost becomes $450,000 x 0.22 = $99,000. The annual saving is $396,000 - $99,000 = $297,000, and a further $1,800,000 - $450,000 = $1,350,000 of cash is released from the balance sheet on the day the old stock clears.Case study
Seen in the real world.
This is an illustrative and clearly fictional example. Meridian Kitchens, an invented manufacturer of fitted kitchen units, produced 24 standard ranges to forecast and held around $4,000,000 of finished stock. Roughly a fifth of it was written down or sold at heavy discount each year as ranges were refreshed.
The fictional management team moved to build to order for the eight slowest selling ranges while keeping the four best sellers in stock. Finished goods inventory fell by about $2,400,000 over two years, and the write-down charge shrank to a small fraction of its previous level.
The illustrative catch was that lead times on the build to order ranges stretched to five weeks and a handful of retail partners dropped them. Meridian judged the trade acceptable because the lost ranges had been the least profitable, and it used part of the released cash to shorten the build cycle to three weeks.
Watch out
Common mistakes.
- Assuming build to order removes inventory entirely, when raw materials and components still have to be bought, stored and financed.
- Promising forecast-driven lead times to customers after switching models, which turns an inventory saving into a service failure.
- Ignoring the higher unit cost that comes from shorter production runs and more frequent changeovers on the line.
Questions
People also ask.
Does build to order suit every product?
No, it works best where products are configurable, expensive or personalised and where customers accept a wait, and it works poorly for low value goods bought on impulse.
How does it affect the cash conversion cycle?
It usually shortens it, because deposits or upfront payments arrive before or during production rather than long after finished goods were paid for.
Is build to order the same as just in time?
They are related but distinct: just in time is about pulling materials into production only as needed, while build to order is about starting production only once a customer order exists.
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