Students last name 1

Students name
Professors name
Management / Production Systems
22 December 2014.
Comparison between MTO-MTS Production Systems
In the following essay, well provide a brief insight and comparisons between two main
production systems: Make-To-Order (MTO), and Make-To-Stock (MTS), the types of contract
they require and the advantages and disadvantages the mentioned represent to the manufacturers.
The questions shown below will be answered in accordance with the objectives of this paper.
1.

Compare and contrast between make-to-stock and make-to-order systems. In your

comparison, why does each system require different types of contracts?

On the pure and simple MTO system, according to Kaminsky and Kaya, clients demand
for a quotation, a correspondent due date for completion and then place the respective purchase
order. As a result, the company has to start a production process to fulfill the customer order and,
in order to complete this process, has to obtain parts or components from the suppliers (1). On
the contrary, a pure MTS system is designed in harmony with the necessities of the market(s) the
company serves. This means that, based either on supply and offer rules, sales season, or simply
market studies, the organization will have to apply more forecasting techniques to stock up
enough of materials, so as to fully comply with the demands of the clients in a timely manner.
Due to the remarked differences on the above mentioned systems, industries find
themselves in the need of offering their customers to engage in the types of selling contracts that
are most suitable for the production system the organization handles, as well as the type of goods
they produce. Companies running on an MTO system usually sell highly customized products,

Students last name 2

such as airplanes, cars, bikes, computers, and so on. This leaves almost no alternative than a
simple type of contract represented on the purchase order placed by the customer. In the
mentioned, the customer, after the quotation process, agrees to buy the ordered products and the
manufacturer has the responsibility of delivering the order on or before the due date. But when it
comes to the MTS system, the variety of contracts broadens up, requiring the manufacturer to
choose among them depending on the type of products made and type of market theyre
addressed to.
2.

What are the advantages and disadvantages of each type of contract?

MTO-related contracts respond mainly to the concrete needs of the customer at the
moment of placing the purchase order, which embodies a sales contract itself. The core
advantages of this type of contracts reside in the cost-effective solution they represent for the
company. By purchasing the necessary materials to complete the orders, the factory decreases
warehousing costs and as added value, it can allocate costs to each order more easily, which
results in a more accurate presentation of financial reports, allowing the management to discern
and measure effectiveness on each order. Nonetheless, the major drawback of this type of
contracts is the sacrifice the company must make in efficiency, by not having enough flexibility
to attend all the upcoming orders due to the absence of stock.
The types of contracts for MTS systems have the main disadvantage of being more
expensive to the company as they can produce great losses if proper forecasting is not performed.
Although, the forecasting process itself is quite expensive, the absence of it will surely produce
undesired losses. As a result, the company must choose from a range of contracts mainly
according to the product it sells.
Hhn makes a good summary of the contrast between contract types:

Students last name 3

Several different contract types can be shown to achieve coordination and to

arbitrarily divide supply chain profit these include revenue-sharing contracts,
buy-back contracts, quantity flexibility contracts, sales-rebate contracts, and
quantity discount contracts. As regards administrative costs, the wholesale price
contract and the quantity discount contract will turn out to be equally costly to
administer, since they only require a single transaction. Other supply chain
contracts like revenue sharing, buy-back, or QF contract are more costly to
administer, since they require additional material or informational flows between
the firms (26).
3.

What type of contract would you choose? Give reasons for your decision.

Choosing a type of contract is a difficult task if the other related factors such as product
type, production system and target market are not taken into account in the decision making
process. Nevertheless, for the purpose of this paper, making a choice would include the election
of the type of product to sell. In my opinion, I would choose a product type that allows me to
engage in a balanced approach of both MTO and MTS systems which is what most corporations
are running nowadays. This is also called a hybrid MTO system. Using this hybrid system would
allow me as a company to offer a wider array of contracts, ranging from simple purchase orders
with the flexibility of handling a stock, giving me the ability to serve rush orders, as well as
benefiting from other types of contracts such as the wholesale price and quantity discount
contracts.

Students last name 4

Works Cited
Hhn, Michaela Isabel. Relational Supply Contracts: Optimal Concessions in Return Policies for
Continuous Quality Improvements. Springer, 2010. Ebook.
Kaminsky Philip and Onur Kaya. MTO-MTS Production Systems in Supply Chains. Proceedings
of 2006 NSF Design, Service, and Manufacturing Grantees and Research Conference. U.
St. Louis, MI. 2006. Grant 0092854.