ERP for make-to-order manufacturing
Make-to-order is a very common form of manufacturing. One business assembles, fabricates, mixes, or otherwise produces a specific item for sale to another entity. One order might be a set of horseshoes for an animal. Another order could be a multi-million dollar production of a nuclear submarine to be delivered in four years to the Navy.
There is a specific item in an agreed-upon quantity to be produced and delivered at a certain time. Production begins when the order is placed by a customer and accepted by a supplier. Of course, we have ERP systems designed for make-to-order businesses.
An MTO manufacturer keeps little or no inventory beyond the components required for an order. Parts and supplies are only purchased when an order is accepted and are completely consumed producing that order. When the order is completed, all inventory values are charged to the cost of sales.
A business only needs to finance inventory during the time of production. ERP supports this method through job or production orders where every purchase is linked to that job number.
Every sale is a specified item requested by a customer and is produced only for that customer's order. There is no theoretical limit to the number of items a business might produce using an MTO strategy. This can also be a disadvantage as some orders will be small and have smaller profits while others can be large with greater risks.
Sales from one period to another can be irregular. Whatever your business results are, ERP will provide the bottom line for you.
Because each order is unique, any order can bring surprises such as a component that is unavailable for a long lead time which can delay delivery and require holding of an unfinished order with no cash relief. ERP can maintain alternate sources and alternate materials in the database and, if approved by the customer, production can continue.
An MTO manufacturer can deliver precisely what a customer wants and might have an advantage over another supplier who can deliver almost what the customer asks for. Production costs can be lower for the MTO manufacturer due to more efficient processes.
They could also be higher if the other manufacturer gains economies of scale or can use lower-cost materials. The customer makes the choice and ERP can help the manufacturer using a make-to-order strategy.
Lean manufacturing is another strategy where a manufacturer tries to eliminate any form of waste from their processes. One of the tools of lean manufacturing is a pull process where labor and materials are never expended until there is a demand for that expenditure.
An MTO manufacturer can use lean processes to enhance their profits and their ERP system provides the data and analytical tools required to ensure optimal performance. Demand-driven is another term used to describe this manufacturing behavior.
An ERP designed for a make-to-order business can simplify a series of complex processes. MTO might require a quote that can be moved to become the budget for a job after acceptance. Actual purchases and production costs can be measured against that quote/budget helping ensure expected profitability.
The same job budget can be reused for follow-on orders reducing future costs. There are many available ERP systems designed for make-to-order manufacturing. You will find one that fits your business needs well.
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