On the transition from make-to-stock to make-to-order

Abstract

Value stream mapping reveals there are two replenishment decisions and three classes of lead times in the manufacturing echelon of a supply chain. The first replenishment decision releases production orders to maintain the finished goods inventory (FGI), and the second replenishment decision issues supplier orders to replenish the raw materials inventory (RMI). The three different classes of lead times are (a) customer lead time, (b) production lead time, and (c) supplier lead time. We develop a z-transform transfer function model of this system to investigate its dynamic performance. We find that FGI costs increase in the production lead time and decrease in the customer lead time, whereas RMI costs increase in both the production lead time and the supplier lead time. We capture the dynamics of, and transition between, make-to-stock (MTS) and make-to-order (MTO) settings in a single unified model. We show that when transitioning from an MTS to an MTO supply chain, RMI costs decrease in the customer lead time for positively correlated demand and exhibit an odd-even oscillation for negatively correlated demand.