What it means
In business, understanding how you produce and store items is vital for managing your cash flow. Make to Stock, often abbreviated as MTS, relies heavily on predicting what customers will want in the future.
Because items are produced beforehand, customers do not have to wait for manufacturing to finish. This creates a fast shopping experience and allows companies to run production lines in large, cost-effective batches.
However, this strategy introduces financial risk. If your sales forecasts are wrong, you end up with excess inventory that ties up valuable cash.
You might eventually have to sell those items at a discount, which hurts your profit margins. Conversely, if you forecast too low, you run out of stock and miss out on revenue while customers buy from competitors.
Balancing your production volume with accurate market research is the key to making this model profitable. It works best for standardized goods with steady, predictable demand, such as basic clothing, packaged foods, and standard office supplies, where consumer preferences do not change rapidly over short periods of time.
In practice
Real-world examples.
Example
A local bakery bakes fifty loaves of sourdough bread every morning before the shop opens, based on average daily sales, hoping customers will buy them all.
Example
A small business making plain cotton t-shirts produces five hundred units in standard sizes and colours ahead of summer, storing them in a local warehouse.
Example
An office furniture manufacturer builds two hundred standard black desk chairs and keeps them boxed up in a distribution centre for rapid next-day delivery.
Think of it
“Making to Stock is like cooking a large batch of soup for a dinner party before your guests arrive. You hope everyone likes it and eats it all, but if fewer people show up, you are left with pots of extra soup that might go to waste.
Formula
Calculation
Production Quantity = Forecasted Sales + Target Ending Inventory - Beginning Inventory
Example: If you forecast selling 1,000 units next month, want to hold 200 units as a safety buffer, and currently have 150 units in stock, your production quantity is 1,000 + 200 - 150 = 1,050 units to manufacture.Case study
Seen in the real world.
Oakfield Books, a mid-sized publisher, decided to use a Make to Stock approach for their popular pocket planners ahead of the new calendar year. Based on historical data, the finance and sales teams agreed on a production run of 10,000 copies, costing 2 pounds per book to print, totalling 20,000 pounds in manufacturing outlays. They priced the planners at 10 pounds each, hoping for total revenue of 100,000 pounds.
However, a sudden shift in consumer habits toward digital calendar apps meant that demand dropped significantly. By the end of January, Oakfield Books had only sold 4,000 copies, generating 40,000 pounds in revenue. The remaining 6,000 copies sat in a rented storage facility, incurring holding costs of 500 pounds per month.
To recover some cash, Oakfield discounted the planners to 4 pounds each in February, selling the rest for an additional 24,000 pounds. Total revenue reached 64,000 pounds against a 20,000 pound production cost and 1,500 pounds in storage fees. While the project remained profitable, poor forecasting tied up cash flow for months and reduced potential earnings.
Watch out
Common mistakes.
- Using outdated sales data to create demand forecasts, leading to massive overproduction of unwanted items.
- Ignoring the cost of warehousing and storing finished goods for long periods, which eats into profit margins.
- Failing to set aside safety stock limits, resulting in unexpected stockouts during sudden demand spikes.
Questions
People also ask.
What is the main advantage of Make to Stock?
The primary benefit is speed. Customers receive their purchases immediately because the goods are already manufactured and sitting in a warehouse ready for dispatch.
How does Make to Stock differ from Make to Order?
Make to Stock produces items in advance based on forecasts, whereas Make to Order only starts production after a specific customer purchase and payment are confirmed.
When should a business avoid using Make to Stock?
You should avoid this strategy when selling highly customized products, expensive goods with low turnover, or items subject to rapidly changing fashion trends.
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