Understanding MTO and MTS in SAP and Difference Between Them

In SAP Supply Chain Management, two fundamental strategies are pivotal in shaping production processes and inventory handling:

1. Make-to-Order (MTO)
2. Make-to-Stock (MTS). 

In this article, we delve into the intricacies of MTO and MTS in SAP, highlighting their differences and the strategies involved in scheduling production and planning capacity.

MTO vs. MTS: Unveiling the Strategies

At their core, MTO and MTS represent distinctive approaches to fulfilling customer orders and managing inventory. Let's explore each strategy in detail:

Make-to-Order (MTO) Production:

MTO production entails the manufacturing of goods in response to specific customer orders. In the context of SAP, MTO signifies producing items tailored to the exact requirements outlined in a particular sales order or customer request. This approach ensures that production resources are allocated efficiently and minimizes the risk of overproduction.

It also allows for customization and caters to unique customer preferences. In MTO, the production schedule is driven by customer demands, necessitating flexibility, coordination, and responsiveness to meet varying specifications and deadlines.

Real-Life Examples of MTO

• Customized Furniture: Companies like IKEA’s custom furniture line or smaller custom furniture makers manufacture items only after receiving specifications from the customer, such as materials, colors, and dimensions.

• Aircraft Manufacturing: Boeing and Airbus typically build airplanes to order for airlines, with custom specifications for seating layouts, cabin features, and even special logos or designs.

• Luxury or Custom Vehicles: Brands like Rolls-Royce and Ferrari produce high-end vehicles tailored to each customer’s specifications, including custom interiors, colors, and performance features.

• High-End Electronics: Certain custom-built computers and servers, such as Dell’s custom computer line, allow customers to choose their specific configuration, components, and software.

• Construction and Engineering Projects: Modular homes, specialized machinery, and custom equipment are often designed and built based on client specifications and project requirements.

Make-to-Stock (MTS) Inventory:

Conversely, the MTS strategy involves producing goods in advance and storing them in inventory until customer orders are received. Within the SAP framework, MTS translates to maintaining a ready stock of items based on forecasts and historical demand patterns.

This approach enables rapid order fulfillment and reduces lead times, contributing to enhanced customer satisfaction. MTS planning requires accurate demand forecasting to avoid stockouts or excess inventory. In MTS, the production schedule is determined by forecasts, seasonality, and trends, requiring a system that can effectively anticipate market needs.

Real-Life Examples of MTS

• Consumer Electronics: Companies like Apple and Samsung mass-produce popular products such as smartphones, tablets, and televisions based on forecasted demand, keeping them in stock for immediate sale.

• Fast-Moving Consumer Goods (FMCG): Everyday items like toothpaste, beverages, and snack foods are produced in large quantities and stored in inventory to quickly meet consistent demand.

• Automotive Industry (Mass Market): Brands like Toyota and Honda manufacture standard models in large quantities based on demand forecasts. They keep inventory ready at dealerships for quick sale to customers.

• Household Appliances: Products like refrigerators, washing machines, and microwaves from companies such as LG and Whirlpool are produced based on demand forecasts and kept in inventory at retail stores for immediate purchase.

• Clothing Retailers: Retailers like H&M and Zara manufacture large quantities of standard-sized clothing in anticipation of demand. These items are stocked in stores or warehouses, ready to be sold to customers without delay.

Scheduling Production: MTO vs. MTS

Scheduling production is a critical aspect of manufacturing strategy. In MTO production, scheduling revolves around incoming customer orders, necessitating a responsive and adaptable system capable of accommodating varying demands and specifications. Close coordination with suppliers, subcontractors, and customers is paramount to ensure timely delivery and quality. In contrast, MTS production scheduling relies on forecasts to plan production activities, requiring a system that can accurately predict demand patterns, seasonality, and trends. The challenge lies in maintaining the right balance between production rate and inventory levels to avoid overproduction or shortages.

Planning Capacity: MTO vs. MTS

Capacity planning determines the optimal level of resources and output a production system can achieve. In MTO production, capacity planning is influenced by fluctuating customer orders, demanding a scalable system that can handle demand variations and different order sizes. The delicate balance between lead time, cost, and quality must be considered when determining capacity utilization. For MTS production, capacity planning hinges on maintaining a consistent output and inventory level, necessitating a stable and reliable system. The trade-offs here involve inventory holding costs, service levels, and customer satisfaction.

SAP Implementation of MTO and MTS

SAP offers a range of strategies that align with MTO and MTS principles, providing businesses with flexibility in adapting to their unique requirements:

• MTO Strategy 20: This strategy involves producing goods only after receiving a sales order. All components are procured based on the BOM (Bill of Materials) once the order is placed, and the final product is stored in sales order segmented inventory.
• MTO Planning without Final Assembly Strategy 50: In this approach, sales forecasts are considered. Some or all raw materials (ROHs) and semi-finished goods (HALBs) can be pre-stocked. The remaining components are procured upon receiving a sales order, and the final product is placed in sales order segmented inventory.
• MTS Net Requirements Planning Strategy 10: This strategy relies solely on sales forecasts. Based on anticipated demand, the finished product (FERT) is stocked as an anonymous inventory. Sales orders have no direct impact on MRP (Material Requirements Planning).
• MTS Planning with Final Assembly Strategy 40: Like Strategy 10, sales forecasts guide the stocking of the FERT. If FERT stock falls short upon receiving a sales order, MRP triggers procuring all BOM levels necessary to replenish the inventory.
• MTS Planning without Final Assembly Strategy 52: This strategy mirrors MTO Strategy 50. Sales forecasts inform pre-stocking decisions for ROHs and HALBs. The remaining components are procured upon receiving a sales order, and the final product is placed in anonymous inventory.

Make-to-Order (MTO) vs Make-to-Stock (MTS)

What to Choose?

Selecting between MTO and MTS depends on various factors, including product characteristics, demand patterns, and market dynamics. MTO is suitable for customized products with varying specifications, while MTS is efficient for products with stable demand and minimal customization requirements.

Ultimately, the strategy chosen shapes production efficiency, inventory management, and customer satisfaction, making it a strategic decision that demands careful consideration.

Conclusion

The choice between MTO and MTS strategies within the SAP ecosystem has far-reaching implications for production and inventory management. Both approaches have their merits and challenges, and understanding the nuances of each strategy is crucial for businesses aiming to optimize their operations, minimize costs, and meet customer expectations in an ever-evolving marketplace.