Ah, the old dilemma: make to order vs. make to stock. The debate has been raging in the world of manufacturing for many years. On the one hand, making to stock (i.e. the process of creating products in anticipation of demand that hasn’t yet materialized) involves a lot of guesswork, with potentially costly results: if demand for a particular product doesn’t meet forecasted levels, you could find yourself in possession of large quantities of unsold stock, which you might have to sell at a loss in order to free up costly warehouse space. Making to order (in which you start your production process only once an order has been placed), on the other hand, presents its own potential pitfalls: you risk meeting demand comparatively slowly, and the relatively lean nature of the typical make-to-order supply chain makes it more susceptible to risk in some ways.
The traditional wisdom for many years has been that your industry and product portfolio will dictate which of these options is best suited to your operations. For products like automobiles, where each individual order is likely to have a certain amount of customization, conventional thinking is that planning to order is safer; whereas toymakers and makers of similarly uniform goods can get away with making to stock. As we move into the Industry 4.0 era, these obvious divisions are starting to dissolve. Many businesses are in a position to adopt a hybrid approach that combines the two—a strategy that may help to alleviate hurdles and disruptions in production processes.
Common Production Hurdles
Generally speaking, production hiccups and other disruptions are the result of a disconnect between expectations and reality. At a very basic level, this might mean a disconnect between your expectation that a particular machine will function at its usual capacity and the reality that it’s in need of maintenance and won’t be able to operate at full steam. On another plane of complexity, you might find yourself in a position where a particular combination of customer orders puts you under time and production constraints that make it difficult or impossible to operate at maximum efficiency—leading to slowdowns and lost value in the form of unfulfilled capacity.
The question, then, in terms of order planning is, “how can you process orders in such a way as to decrease the possible gap between expectations and reality?” This question applies equally to both make to order and make to stock processes: for the former, you’ll need to gain visibility into what goes into (and comes out of) each order; for the latter, you’ll need a clear understanding of how your existing stock relates to orders as they come in (i.e. which orders can be fulfilled with which individual products in which locations). In both cases, the key to keeping your expectations in line with reality begins with a stronger understanding of your bill of materials (BOM).
Exploding the BOM
Pop quiz: for any individual product, how easy is it for you to determine what raw materials, people, machines, and processes you’ll need to allocate? In order to manage your orders in a cost-effective way, the answer really needs to be “very.” Why? Because fulfilling orders is in large part about the allocation of resources, and optimal order planning requires optimal resource allocation; how can you make that happen if you don’t know what resources you need to fulfill which orders? In an ideal world, each order created would be met with a BOM explosion, giving planners a full manifest of the necessary materials and processes that will go into the finished product. Thus, each order could be put into conversation with all the others, helping you to procure resources and schedule production programs in a more holistic, dynamic manner.
By taking this step to improve your operational visibility from a parts perspective, you decrease the chance that you’ll find yourself without the necessary resources to fulfill a particular order. Even in a make to stock environment, this approach can help you gain a higher degree of production control, meaning that you’re more likely to operate at close to maximum capacity. As such, you’ll have no trouble meeting forecasted demand—and thus no trouble filling orders when they come in. Compare this to the alternative, where you have very little in the way of granular insight into each bill of materials, resulting in a “hope and pray” approach to meeting either forecasted or actual demand.
The Power of S&OE
So far, we’ve treated order planning as anything that flows from order creation, regardless of whether you’re making to order or to stock. But like we said above, the Industry 4.0 era is increasingly making it possible to adopt a hybrid approach between the two. More specifically, Industry 4.0 is making it possible to track demand and resource/transport availability in real-time, meaning that you can adjust your demand planning and your expectations on a daily or even hourly basis. From there, you can adjust your procurement and production ratios accordingly. In this way, you can essentially find the middle ground between being proactive and waiting for demand to emerge. Yes, you’ll be using forecasts to get the ball rolling and get an early jump on procuring parts and generating production plans, but your actual throughput will be a direct reflection of demand as it emerges—such that the likelihood of a mis-calibration between expectations and reality is actively reduced.
As it happens, there’s a name for the process that we’re describing: sales and operations execution, or S&OE. Like much of what we’ve described above, it requires a high degree of connectivity and visibility before it can be put into practice, which is why it’s only just emerging as a process at the dawn of the Industry 4.0 era. By putting this practice into place, manufacturers can effectively bridge the gap between medium to long term planning and day-to-day supply chain operations in order to reduce the likelihood of breakdowns and disruptions. Since, in this scenario, you’re working to bring your expectations in line with reality on a daily basis, you’re much less likely to be blindsided by the unexpected. In this way, the line between making to order and making to stock becomes profitably blurry.