Make To Order MTO Unlocking Custom Manufacturing

Core Description

• Make To Order (MTO) is a production strategy where manufacturing starts only after receiving a firm customer order, aligning output precisely with real-time demand.
• MTO minimizes finished-goods inventory, enables high customization, and often allows businesses to command premium pricing for tailored products.
• The strategy suits complex, low-volume products but brings trade-offs such as longer lead times, higher supply chain coordination requirements, and demand variability risk.

Definition and Background

What is Make To Order (MTO)?

Make To Order (MTO) is a demand-driven manufacturing approach in which the production process begins only after a customer's confirmed order, often reflecting unique requirements. This contrasts with Make To Stock (MTS), where goods are manufactured based on demand forecasts and stored as inventory, ready for immediate delivery.

Historical Evolution

• Pre-Industrial Era: Before factories, nearly everything was made to order. Artisans constructed products like ships or furniture according to client specifications, resulting in long lead times and customized craftsmanship.
• Industrial Revolution: The adoption of standard parts and steam power shifted many industries to MTS, but MTO continued in low-volume, high-variation niches, such as machinery and locomotives.
• Mass Production and Fordism: Standardized mass production dominated, though sectors needing high customization—like shipbuilding and specialized equipment—remained MTO-focused.
• Postwar Lean and Digitalization: The rise of lean/JIT (just-in-time) and digital tools like ERP and CAD/CAM systems enabled MTO factories to improve scheduling, reduce waste, and flexibly configure products.
• Mass Customization and Digital Era: With technologies like CPQ (Configure-Price-Quote), e-commerce, and 3D printing, even smaller firms can now offer tailored products quickly, supporting the mainstreaming of MTO strategies.

Key Principles of MTO

• Pull-Based Production: Manufacturing begins only in response to a confirmed order.
• Customization: Each order may involve unique specifications, options, or components.
• Inventory Management: Focus on reducing or eliminating finished-goods inventory, while balancing critical parts and work-in-progress (WIP) buffers.
• Lead Time Commitment: Promise-to-deliver windows are carefully managed and communicated, reflecting true production and supply constraints.

Calculation Methods and Applications

Process Flow Overview

A typical MTO process includes:

1. Inquiry & Configuration: Customer requests and defines product.
2. Feasibility & Costing: Evaluate capability to deliver, aggregate costs.
3. Quotation & Commitment: Price the job, quote realistic lead times.
4. Order Entry & Engineering: Confirm technical requirements, finalize configuration.
5. Procurement: Source unique and critical components needed for the order.
6. Fabrication & Assembly: Actual make/assembly to customer’s requirement.
7. Quality Assurance: Conduct checks and validations at defined gates.
8. Delivery: Package, ship, and document the completed product.
9. Continuous Improvement: Use feedback to refine costing, design, and scheduling.

Calculation Methods

• Lead Time Calculation:Lead time = Total procurement time (for unique parts) + Setup time + Production (run time) + Internal queue/move time + Shipping time. Each is driven by actual capacity and supplier commitments under finite scheduling rules.
• Cost Calculation:
  • Direct material cost: As per the customized Bill of Materials (BOM).
  • Labor cost: Estimated hours × rate for routing steps.
  • Overheads: Allocated based on activity drivers or progress milestones.
  • Risk/Surcharge: For rush orders, engineering changes, or small lots.
• Pricing: Scenario analysis to test price under different volume, expedite, and customization options. Premiums may be added for high variability or customer-specific tooling.

Applications Across Industries

• Aerospace: Illustrated by Boeing’s build-to-order aircraft, with custom cabin layouts and specification-driven assemblies leading to long, sequenced production timelines.
• Industrial Equipment: Custom-sized machinery built by companies like GE Vernova, where each order requires detailed configuration and acceptance testing.
• Medical Devices: Imaging systems tailored for specific hospitals, as seen with GE Healthcare MRI units, produced against firm purchase orders.
• Furniture: Premium brands like Steelcase produce configurable office systems with tailored dimensions and finishes, quoting extended but realistic lead times.

Comparison, Advantages, and Common Misconceptions

How MTO compares with alternatives

Advantages of MTO

• Minimized Inventory Holding: Finished-goods inventory is reduced, lowering holding costs and risk of obsolescence.
• Premium Pricing & Customization: Ability to command higher prices for tailored products.
• Better Demand Alignment: Production exactly matches real, confirmed demand, reducing forecast-driven waste.
• Improved Cash Flow: Material and labor costs are incurred after deposits or order confirmation.

Challenges of MTO

• Longer Lead Times: Fabrication starts after order, potentially risking lost sales if customers are impatient.
• Complex Supply Chain Coordination: Synchronizing suppliers, capacity, and unique components is more demanding.
• Cost Structures: Unit costs may rise due to shorter runs, more setups, and higher exposure to procurement premiums.

Common Misconceptions

• MTO eliminates all inventory: In reality, critical parts, WIP, and buffers still exist to prevent supply chain delays.
• MTO guarantees faster delivery: In practice, MTO often results in longer lead times compared to pre-stocked models; speed is driven by modularity and effective planning.
• MTO is always cheaper than MTS: Cost per unit can be higher due to the loss of scale efficiencies, even though carrying costs are lower.

Practical Guide

Assessing Suitability for MTO

• Evaluate customer willingness to accept longer lead times and pay for customization.
• Segment orders by product complexity, value, and required service level.
• Quantify trade-offs: setup time, demand variability, lead-time commitments, and the risk of lost sales.

Product Design and Modularization

• Use modular platforms and standardized interfaces to offer late-stage differentiation with minimal engineering effort.
• Apply Design-for-Manufacture-and-Assembly (DFMA) tools to compress setup and assembly times.

Quotation and Order Promising

• Use CPQ (Configure, Price, Quote) tools to manage configuration rules and pricing tiers.
• Implement Capable-To-Promise (CTP) functions to provide realistic delivery windows that consider true material and capacity constraints.

Supply Chain and Capacity Planning

• Identify long-lead components and dual-source critical items to reduce supply risk.
• Use framework purchase orders and supplier portals for collaborative scheduling and real-time updates.

Technology and Data Governance

• Integrate ERP (Enterprise Resource Planning), APS (Advanced Planning and Scheduling), MES (Manufacturing Execution Systems), and CPQ for seamless order-to-build execution.
• Maintain up-to-date data for BOMs, routings, and option codes to ensure traceability and auditability.

Performance and Continuous Improvement

• Track metrics such as on-time delivery, lead time accuracy, cost variance, and rework rates.
• Use feedback loops and regular A3/PDCA (Plan-Do-Check-Act) reviews to continuously enhance process reliability.

Case Study (Fictional Example, Not Investment Advice)

Scenario: "Nordic Fabrication," a mid-size European custom furniture maker, shifted from Make To Stock to Make To Order after experiencing excess inventory and frequent markdowns on unsold designs. By adopting MTO, they implemented a CPQ system that allowed customers to specify materials, dimensions, and finishes online. With finite-capacity planning and supplier collaboration on key wood types and hardware, Nordic Fabrication increased on-time delivery from 76% to 91% within one year. Despite slightly longer lead times (average 9 weeks), their order win rate rose due to higher perceived value and pricing power.

Resources for Learning and Improvement

Core Textbooks and Academic Journals

• Factory Physics by Hopp & Spearman: In-depth on variability, bottlenecks, and lead time.
• Production and Operations Analysis by Nahmias & Olsen.
• Operations Management by Slack et al.
• Journals: International Journal of Production Economics, Journal of Operations Management, Production and Operations Management.

Industry Bodies & Standards

• ASCM (Association for Supply Chain Management) – SCOR Model for benchmarking and best practices.
• ISO 9001, IATF 16949 for quality; ISO 31000 for risk management; ISO 27001 for data security.

Case Studies & White Papers

• Boeing 787 order-driven assembly (see MIT Sloan Management Review).
• Dell’s historic build-to-order PC operations.
• BMW Individual’s configured luxury vehicles.
• White papers from SAP, Kinaxis, and Gartner provide recent best practices.

Technology and Tools

• ERP/APS/MES: SAP S/4HANA, Oracle Cloud SCM, Microsoft Dynamics 365, Kinaxis, o9 Solutions.
• CPQ platforms: Configure One, Salesforce CPQ.
• MES for shop floor execution: Siemens Opcenter.

Certifications & Courses

• ASCM’s CPIM (Certified in Planning and Inventory Management), CSCP (Certified Supply Chain Professional), and CLTD (Certified in Logistics, Transportation and Distribution).
• MOOCs: Operations and supply chain courses on platforms like edX (MITx, Georgia Tech), Coursera.

Conferences

• ASCM CONNECT, Gartner Supply Chain Symposium/Xpo, INFORMS and POMS annual conferences.

Benchmarking & Data

• APQC Process Classification Framework and metrics database.
• ISM (Institute for Supply Management) reports for industry benchmarks.

Regulatory & Compliance

• Sector-specific: FAA, FDA, and ITAR/EAR for regulated industries.
• Contract standards: Incoterms, UCC Article 2 for global contracting.

FAQs

What is Make To Order (MTO)?

MTO is a manufacturing strategy where production begins only after a firm customer order is received, allowing for deep customization and minimizing finished-goods inventory.

How does MTO differ from Make To Stock (MTS)?

Unlike MTO, MTS produces goods based on forecast and holds inventory for immediate sale, prioritizing short delivery but bearing the risk of overstock. MTO builds only after an order, enabling more customization but often resulting in longer lead times.

What are the major advantages of MTO?

Key benefits include lower inventory carrying costs, reduced risk of inventories becoming obsolete, premium pricing for tailored products, and tighter alignment with customer demand.

What are the risks involved in MTO?

Risks include longer lead times, higher dependency on supplier responsiveness, potential scheduling bottlenecks, and complexity in cost control for highly unique orders.

Which industries best suit the MTO model?

Industries characterized by lower volume but high product complexity and customization needs, such as aerospace, specialty automotive, industrial machinery, medical devices, and bespoke furniture.

How is lead time determined in MTO operations?

Lead time covers the combined duration of engineering, procurement, assembly, and testing, relying heavily on real-time capacity and supplier reliability at each production stage.

How are costs and pricing calculated in MTO?

Pricing aggregates the cost of materials, labor, overhead, and surcharges for custom features. Scenario analysis is used to ensure that unique job requirements are accurately reflected in quotes.

What digital systems are necessary for MTO success?

Key systems include CPQ for quoting, ERP/MRP for planning, APS for scheduling, and MES for execution. Integration of these tools ensures smooth information flow and accurate promise management.

Conclusion

Make To Order (MTO) is a strategy for aligning the production system with real, confirmed customer demand, thus enabling advanced customization, minimizing finished-goods inventory, and allowing for premium pricing. Its successful application requires careful trade-off analysis—balancing customization and responsiveness with the realities of longer lead times, complex supplier relationships, and capacity planning.

MTO is well suited to sectors where variety, complexity, and customer requirements are prioritized over speed. Its adoption is supported by modern digital tools, supplier collaboration, and Lean manufacturing principles. When implemented with discipline—embedding robust configuration, reliable promise dates, and continuous improvement—MTO can enhance margins, operational agility, and customer value in today's competitive markets.