Make to stock is a type of production approach that seeks to match the pace or rate of a manufacturing production line with the anticipated demand for those goods by consumers. The idea is to use demand forecasts to set production schedules and generate enough product to meet those needs, without stockpiling huge amounts of finished goods in warehouses. If successful, a make to stock strategy makes it easier to control costs and minimizes the taxes paid by the company on finished goods held in an inventory.
The efficiency of using a make to stock method rests in accurately predicting consumer demand. This means looking closely at a number of relevant factors. An accurate projection will consider historical data that identifies shifts in demand based on seasonality or certain events occurring within the economy. Those findings will be kept in mind when assessing the potential for those events to occur in the upcoming production period. For example, if the historical data indicated that consumers purchased twenty percent less of a given product during a period of recession, and there is evidence that a recession is imminent, the manufacturer may adjust production quotas downward to match the anticipated decrease in demand.
Businesses are able to minimize a number of expenses by using the concept of make to stock. The purchase of raw materials is conducted based on the projections. If demand is anticipated to drop for a given period of time, the business may choose to cut back on the amount of raw materials kept on hand and also scale back the hours of production. At the same time, an anticipated upswing in demand may require purchasing additional raw materials, which may generate some savings based on the volume of those purchases. The company can also utilize the most cost-effective means of scheduling additional labor for the production process, which in turn helps to keep the rate of return on each produced unit within a reasonable range.
While a make to stock approach can be extremely beneficial when the demand projections are accurate, this strategy can be devastating should those predictions prove to be false. The company may experience an influx of orders that cannot be filled within a reasonable period of time, prompting customers to seek out the services of a competitor. At the same time, an inaccurate projection involving an increase in demand could lead to a huge finished goods inventory that incurs a much larger tax obligation.
