There is confusion in the industry as to the definitions of make-to-order (MTO) and make-to-stock (MTS). I encounter this at many clients.
On a previous project the planner said, “We are a make-to-order shop. We stock all raw materials and semi-finished goods based on a forecast. But we wait until the customer’s sales order is entered and then we make the finished good”.
I asked, “Is the finished good stock segregated by sales order in the stock overview”?
Once he told me that the stock was not segregated by sales order, I advised him that he is not running a make-to-order shop. In fact, he’s running a make-to-stock shop!
This blog post discusses two possible definitions and comes to the conclusion that inventory segmentation is the true determining factor for make-to-order.
Definitions of MTO and MTS from SAP
Even within the SAP websites the definitions are not clear:
Definition 1 from SAP Help
You can decide if production is triggered by sales orders (make-to-order production), or if it is not triggered by sales orders (make-to-stock production).
Definition 2 from SAP Glossary
Make-to-order Production: A type of production in which a product is manufactured for a particular customer. (My comment: SAP means *manufactured for a particular sales order/item).
Make-to-stock Inventory: An inventory of goods that were not manufactured for specific sales orders or projects. The stock is anonymous.
Definition 1 says that the difference between MTO and MTS is how production is triggered: actual sales orders or sales forecast respectively. Definition 2 suggests the difference is whether the resulting finished goods inventory is segregated by sales order. In my opinion Definition 2 is correct. Definition 1 is not definitive because within both MTO and MTS there is a continuum of production triggering before and after the sales order.
Let’s take a closer look…
Definition 1 – Triggering of Production
Depending on the planning strategy set in the finished product (FERT) material master and the settings in the assemblies’ material masters it is possible to stock at different BOM levels based on forecast, prior to the entry of the sales order. In the graphic below semi finished HALB1 is stocked based on the forecast for the finished product but production of the finished product and HALB 2 and its two assemblies is triggered only after the sales order is entered.
Nothing in this graphic tells us whether this is make-to-order or make-to-stock production!
Stocking at different BOM levels
In fact, there is a continuum of stocking levels and procurement triggering for MTO and MTS planning strategies as you can see in the graphic below.
Possible stocking levels for several MTO and MTS Planning Strategies
With MTO Strategy 20 there is no sales forecast. Nothing is stocked prior to receipt of the sales order. Once the sales order is entered MRP triggers you to procure all BOM levels and place the FERT in sales order segmented inventory.
With MTO Planning without Final Assembly Strategy 50 sales are forecasted. You can choose to stock some/all ROHs and some/all HALBs prior to the receipt of the sales order. Once the sales order is entered MRP triggers you to procure the remaining ROHs, HALBs and the FERT and place it in sales order segmented inventory.
With MTS Net Requirements Planning Strategy 10 sales are forecasted. You stock the FERT as anonymous inventory based on forecast. The sales order has no effect on MRP.
With MTS Planning with Final Assembly Strategy 40 sales are forecasted. You stock the FERT as anonymous inventory based on forecast. If there is insufficient FERT stock when the sales order is entered, MRP will trigger you to procure all BOM levels until the extra FERTs are stocked. So these extra sales orders trigger procurement of all BOM levels.
MTS Planning without Final Assembly Strategy 52 is the close-cousin of MTO Strategy 50. Sales are forecasted. You can choose to stock some/all ROHs and some/all HALBs prior to the receipt of the sales order. Once the sales order is entered MRP triggers you to procure the remaining ROHs, HALBs and the FERT and place it in anonymous inventory.
Therefore, the SAP Definition 1: You can decide if production is triggered by sales orders (make-to-order production), or if it is not triggered by sales orders (make-to-stock production) is not correct.
Definition 2 – Segmentation of Finished Goods Inventory
Here is the Stock Overview of a MTO finished good material C-1100:
Stock Overview for a MTO material
If you double click on the line “Sales Order Stock” you see that 30 PC of the 77 PC are tied to sales order 242; 17 PC are tied to sales order 509 and so on. So, the inventory is segmented by sales order. This segmentation defines make-to-order!
Sales Order Stock
Now here is the Stock Overview of a MTS finished good material 578:
Stock Overview for a MTS material
Notice that there is no line “Sales Order Stock” under the storage location 0001.
In summary, with MTO production the resulting inventory is tied to a sales order; in MTS the inventory is not tied to a sales order. Therefore, segmentation of inventory by sales order is the only true determinant for make-to-order.
Note that it is possible for a material to exhibit both MTO and MTS behaviours. Manufacturers of sanitary appliances (toilets) are MTS but once in a while a customer will request toilets without the manufacturer’s logo stamped on them, which is the normal practice in the industry. So they switch to MTO for this sales order/item so that the stock is kept separate.
Because there is confusion in the industry as to the definitions of make-to-order and make-to-stock you are well advised to ask several questions and look in your client’s SAP system before deciding what type of production they run. You don’t want to start off on the wrong foot with your client!