Train vs. Elevator: 3 Myths About Build-to-Stock
Nick Ostdick - September 06, 2016
In our most recent entry, we discussed build-to-order (BTO) planning and production strategies and when it makes sense for OEMs to leverage BTO principles to ensure streamlined production programs and enhanced customer relations through timely order fulfillment. We also briefly addressed how BTO is not the only production planning strategy available to OEMs and how build-to-stock (BTS) has its place and function in a company’s demand planning platform.
Whereas BTO strategy is based solely on incoming customer orders, BTS functions on forecasting and demand history in terms of scheduling production programs and inventory management. Essentially, BTO functions like an elevator in that the elevator car only operates when a rider pushes a button to be transported to a certain floor - or when a customer order is created. On the other hand, BTS operates more like a commuter train where the number of train cars and daily routes is based on past ticket sales and ridership - past demand and history is used to forecast future demand in order to schedule the right number of production programs to meet this anticipated demand.
While BTO strategy plays an intergral role in automotive manufacturing sector, BTS - also referred as make-to-stock (MTS) - has its own place in a planned production strategy, despite the myths and rumors surrounding it. Products and component parts where demand is stable and consistent are prime candidates for BTS production because it’s less efficient and more risky to schedule production based on incoming orders - the constant demand for these parts actually requires enough inventory to satisfy customer demand.
And this is just one example of the inaccurate information about BTS strategy in today’s supply network. To further help demystify BTS strategy, here are 3 myths about BTS and the truth behind this misinformation.
Myth #1: BTS is well-suited for varied or multiple production lines with short changeover times.
Because BTS is based on the push-system of supply chain management, it’s well-positioned to facilitate single production lines that require long changeover times. For example, imagine an OEM produces a small widget necessary for production of a larger component part. In order to ensure this larger component part can be manufactured on a steady basis, the maker of the widget would view BTS as a value-added proposition because they can dedicate certain production resources solely to manufacturing this widget on a consistent basis without having to worry about competing production programs.
Myth #2: The biggest challenge with BTS is keeping production programs operating smoothly as possible to meet customer orders.
If BTS is based on demand history and forecasting, maintaining production levels concurrent with incoming orders is not the biggest challenge. Instead, managing inventory to ensure enough product without experiencing costly overages and the accuracy of forecasting are perhaps the two biggest hurdles in implementing a BTS strategy. Specifically in terms of forecasting, companies must leverage powerful reporting and analytic solutions to create the most precise, accurate models for future planned productions. Thinking about our commuter train analogy: the goal is to offer the right number of routes during the right time of day to service the right number of customers. With BTS, the biggest challenge is to schedule the right number of production cycles to ensure the right number of products for the right number of customers.
Myth #3: BTS is an instant liability for manufacturers in today’s global supply network.
Instant liability? Not quite, though as we noted BTS does have its own set of limitations - the trick is for manufacturers to understand these limitations and leverage BTS strategy where it makes the most sense. In today’s global supply stream, with production hubs scattered across the globe and markets emerging in new regions with specific needs, BTS can provide value for manufacturers to meet inventory needs and customer demand provided the capability to accurately predict and forecast that demand. While many industry analysts would agree the sweet spot in production programs is a mix or combination of BTO and BTS, BTS provides companies the flexibility and responsiveness to fill customer orders for certain component parts at a moment’s notice without having to schedule or reallocate resources for additional production. This should hardly be conceived as a liability especially when competition can be strong in emerging markets for access to resources.
In addressing these myths, it’s important to realize BTS is less of an old, out-of-date production concept and more of a niche strategy that, when leveraged properly, can help manufacturers remain agile and competitive in today’s complex supply stream. Even though the automotive manufacturing industry is a complex, variant-rich enterprise, BTS provides production cycle stability and reliability to meet the need and demand for products without which the industry simply cannot operate.