Posted in Operations and Supply Chain Terms, Total Reads: 1623
Definition: Build to Stock
Build to stock or make to stock is a production strategy in which goods are produced and stored in form of inventory to meet a future demand. In case, present demand is low, future demand is forecasted and production planning is done in such a way that inventory cost as well as opportunity loss due to stock out are minimum.
It reduces the overtime cost, utilizes present idle capacity, saves maintenance cost due to rugged use of machines in future, prepares producer to meet demand better etc. But it may also result in greater inventory cost or opportunity loss due to stock-out due to incorrect forecasting. Therefore, this strategy can work better for those products for which forecasting can be done accurately. For other cases, make to order or assemble to order can work better.
Example: Suppose XYZ Company produces woolen clothes for which demand comes during October to February. In build to stock strategy, XYZ forecasts demand for woolen clothes during the period and makes a production plan. It produces based on its plan and builds inventory. As the demand comes, it decreases its inventory level. In this way, it pushes its inventory to warehouses and then fulfills the demand on pull basis.
One needs to choose a make to stock approach, in the following cases:
• The resources are not segregated. They are not assigned according to specific sales orders.
• Expenses need to be gauged at material stage and not at sales order stage.
One should always employ make-to-stock production if one produces stock autonomously of orders because one wants to provide the clientele straight away with goods from that stock later on. If you anticipate that there might be client demand in the prospect, you might even want to produce supplies without having sales orders. Proceeds that have approved quality inspection and other unforeseen goods receipts can be used for other sales orders.
This does not imply that you have irrationally high stock levels. You can keep away from them by:
• Creating a production plan in advance in order to plan your stock.