What it means
In a make to stock business the forecast, rather than the customer order, sets the production schedule. Factories run in economic batch sizes, finished goods flow into a warehouse, and orders are filled from that pool.
The whole system is designed so the customer never has to wait. That immediacy is the commercial reason the model exists.
Shoppers rarely wait for a bottle of shampoo or a standard-sized pair of boots to be made, so availability drives sales directly. In retail language, an empty shelf is a lost sale that usually goes to a competitor.
The accounting consequence is a large inventory balance on the balance sheet and a matching draw on working capital. Cash is locked up from the moment raw materials are bought until the finished item is sold and the customer pays.
Forecast too high and the business ends up discounting or writing stock off. The two main control levers are the reorder point and safety stock.
The reorder point is the inventory level that triggers a replenishment batch, calculated from average demand and the time it takes to resupply, while safety stock is the extra buffer held to cover demand spikes and late deliveries. Set both too high and cash is wasted, set them too low and customers meet stockouts.
Make to stock works best for stable, high-volume products with few variants and predictable demand. It fails badly for products with short life cycles, heavy seasonality or hundreds of configurations, which is why many businesses run a hybrid model.
Deciding which items sit in which category is usually the single biggest inventory decision a manufacturer makes.
In practice
Real-world examples
Example 1
A soft drinks bottler produces to a rolling 13 week forecast and ships from three regional depots. Supermarket contracts require next-day delivery in full, so anything below the agreed service level triggers penalty charges, which makes carrying stock non-negotiable.
Example 2
A workwear brand holds core navy and black garments in every size in a make to stock model, while embroidered corporate versions are made to order. The core stock sells year-round, so the forecast is reliable and the write-off risk is low.
Example 3
A component distributor stocks 4,000 fittings bought in from overseas with a 10 week shipping lead time. Because reordering takes so long, its reorder points and safety stock levels are the most important numbers in the business.
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
Reorder point = (average daily demand x replenishment lead time in days) + safety stock
A household goods manufacturer sells an average of 450 units a day of one line, and it takes 12 days from raising a works order to having finished units back in the warehouse.
Demand during the lead time = 450 x 12 = 5,400 units.
The planner holds three days of cover as safety stock: 450 x 3 = 1,350 units.
Reorder point = 5,400 + 1,350 = 6,750 units. When warehouse stock falls to 6,750 units, a new batch is released.
At a manufactured cost of $8 a unit, the reorder point represents 6,750 x $8 = $54,000 of cash sitting in stock at the moment of reordering, and the safety stock alone permanently ties up 1,350 x $8 = $10,800.
If the finance director asks what an extra two days of safety stock would cost, the answer is 450 x 2 = 900 extra units, or 900 x $8 = $7,200 of additional cash locked up, plus the annual holding cost on it.Case study
Seen in the real world
This illustrative case describes a fictional company. Calder Home Goods sold storage boxes into hardware chains and made everything to stock across 60 colour and size combinations. Service levels were excellent, but at year end the warehouse held 140 days of inventory and the auditors pushed for a write-down on slow lines.
An analysis showed that 12 of the 60 combinations produced 78% of unit sales. Calder kept those 12 on a make to stock basis with tight reorder points, and moved the remaining 48 to a four week make to order arrangement with its retail customers.
In this fictional example inventory fell to 71 days within two quarters and the write-down disappeared, while sales of the fast lines were unaffected. The uncomfortable part was telling three retail buyers that their favourite colours now carried a lead time.
Watch out
Common mistakes
- Treating a demand forecast as a plan rather than an estimate, and never measuring forecast accuracy to see how wrong it usually is.
- Setting one blanket safety stock rule across every product line, when a fast, stable line and a slow, erratic one need very different buffers.
- Judging the model only on service level while ignoring the cash it consumes and the write-offs it eventually produces.
Questions
People also ask
What is the difference between reorder point and safety stock?
The reorder point is the total trigger level including the buffer, while safety stock is only the buffer portion held for demand and supply variability.
Does make to stock always mean high inventory?
Not necessarily, because short lead times and accurate forecasts allow low stock levels, but longer supply chains push the required cover up sharply.
How do you decide which products to make to stock?
Rank items by volume and demand stability, hold the fast and predictable lines, and push the slow or highly variable tail towards make to order.