A Make-to-Stock company carries finished goods in its inventory in an anticipation for order. Most of such companies promises quick delivery, typically either same day or the nesxt day.
But the problem of course, is guessing how much each of the finished goods to keep in each stock unit. Too high stock can tie up the company’s cash and consume space, also the risk of obsolescence. Too low may incur in lost sales and unhappy customer.
There are four primary factors that influence the amount of finished goods carried by a Make to Stock company.
- Reorder Point: We must carry enough stock to cover the variability of our demand over the reorder point time. For example, assume that our lead time to reorder is three weeks, with average demand of 100 units per week. We have scheduled our production at 100 units per week. We would, therefore, need to carry a “safety stock” level of inventory sufficient to cover the historical variability of demand over this three-week period.
- Production Lot Size: If our planned production lot size exceeds the typical order quantity, some amount of finished goods will remain in stock between deliveries. Let’s assume that our average shipping rate is 100 units per week, and our production lot size is 400 units. On average, we would have 300 units left over when our production lot arrives. These would last for approximately four weeks and obviously effect our level of finished goods inventory. Therefore, The greater the lot sizes, the greater the resulting average inventory level.
- Production Reliability (on-time completions): The poorer the reliability of on-time completions, the greater the level of finished goods inventory required to assure the targeted service level.
- Variability of Demand: The amount of inventory required to avoid a stock-out is considerably less if demand varies from 90 to 110 every week, vs, varying from 0 to 300 per week. There are many components that cause variability of customer demand. Some of those components are within our control. Others are controlled by customer marketplace.
Given this factors that affects the make-to-stock companies, it is easy to make goods that can’t be sold, and not to make goods that could be sold. The net effect is to reduce potential throughput.