What it means
Under make to order, the customer order is the trigger that releases materials and machine time. Everything upstream of that trigger, from purchasing to scheduling, is pulled by real demand rather than a forecast.
The result is a business that carries raw materials and work in progress but almost no finished goods. The financial appeal is cash.
Money that would otherwise sit in unsold stock stays in the bank, and the risk of writing off obsolete or unfashionable inventory largely disappears. Many make to order businesses also collect a deposit up front, which means customers help fund the working capital cycle.
The cost is responsiveness. A customer who wants the product today will go elsewhere, and production volumes swing with the order book, so machines and skilled staff sit idle in quiet weeks.
Pricing has to carry that idle capacity, which is one reason bespoke goods are more expensive per unit than mass-produced equivalents. Make to order suits products that are configurable, expensive, bulky or highly seasonal.
Bespoke furniture, industrial machinery, printed signage and tailored clothing are natural fits, as is anything with so many variants that stocking every combination would be absurd. Cheap commodity items bought on impulse are a poor fit.
A common middle path is assemble to order, where standard modules are held in stock and only the final configuration waits for the customer. That keeps quoted lead times short while still avoiding a warehouse full of finished variants.
Many manufacturers run both models side by side, with fast-moving lines made to stock and specials made to order.
In practice
Real-world examples
Example 1
A commercial kitchen manufacturer builds every stainless steel counter to the customer's floor plan. It buys sheet steel to a rolling forecast but cuts nothing until a signed drawing and a 40% deposit arrive, so its balance sheet shows raw materials and work in progress but almost no finished goods.
Example 2
A printing business producing exhibition graphics holds blank substrate and ink in stock and prints only against confirmed jobs. Because artwork changes constantly, anything printed speculatively would be scrap within weeks, so make to order is the only sensible model.
Example 3
An electric bike assembler offers 14 frame sizes across four colours and three battery options. Rather than hold 168 finished combinations, it holds components and assembles each bike after the order, quoting a 12 day build window on its website.
Think of it
Imagine running a restaurant. A make-to-stock restaurant cooks dozens of meals in advance and hopes people buy them, often throwing away cold food at the end of the day. A make-to-order restaurant only fires up the grill after the customer places their specific order.
Formula
Calculation
Quoted customer lead time = material procurement time + production time + despatch time
Finished goods inventory investment = daily output x unit cost x days of finished stock held
A workshop making commercial seating quotes 10 working days to procure fabric and frames, 6 days to build and finish, and 2 days to pack and despatch.
Quoted lead time = 10 + 6 + 2 = 18 working days.
The same workshop previously ran make to stock, producing 20 units a day at a manufactured cost of $600 each and holding 30 days of finished goods. Average finished goods inventory was 20 x 30 = 600 units, worth 600 x $600 = $360,000.
At a holding cost of 18% a year covering warehousing, insurance, financing and obsolescence, that stock cost $360,000 x 0.18 = $64,800 a year to carry.
Moving to make to order releases the $360,000 of cash tied up in finished goods and removes the $64,800 of annual holding cost, in exchange for asking customers to accept an 18 day wait. If even 5% of customers walk away over the wait, and each lost order carried $900 of contribution, the workshop would need to lose fewer than $64,800 / $900 = 72 orders a year for the change to still pay.Case study
Seen in the real world
The following is an illustrative, fictional scenario. Fernhill Joinery made kitchen cabinetry and for years held a standing stock of its ten most popular door styles. Cash was permanently tight, the workshop was cluttered, and each January the team discounted whatever had not sold.
Fernhill switched to a make to order model, keeping only sheet materials and hardware in stock and quoting a three week lead time. Finished goods inventory fell from roughly $290,000 to under $20,000, and the released cash paid off the overdraft that had been costing the business interest every month.
The illustrative sting came in the second summer, when a competitor with stock on the shelf won three kitchen refit jobs Fernhill would previously have taken. The eventual answer was a hybrid: two best-selling door styles were made to stock, everything else made to order.
Watch out
Common mistakes
- Assuming make to order removes all inventory risk, when raw materials and work in progress can still tie up substantial cash and go out of specification.
- Quoting a lead time based only on production time and forgetting that material procurement and despatch usually add more days than the build itself.
- Pricing make to order work as though the factory were fully loaded, which leaves the idle capacity between orders uncovered.
Questions
People also ask
Is make to order always cheaper than make to stock?
No, it removes holding and obsolescence costs but usually raises unit cost through smaller batches, more setups and idle capacity between jobs.
How do make to order businesses manage cash flow?
Most take a deposit at order and stage further payments at agreed milestones, so the customer funds much of the production cycle.
Can a business run both models at once?
Yes, and most manufacturers of any size do, holding stock on high-volume predictable lines and making the long tail of variants only when ordered.