What is make-to-order versus make-to-stock?

In make-to-order, the sales order creates the work order. Material may be bought for the job or drawn from raw stock, the job is costed on its own, and the customer waits for the manufacturing lead time. Job shops, fabricators and machining subcontractors are mostly MTO: every bracket, frame or housing is to the customer's drawing. The advantages are low finished-goods stock and a cost per job that is real rather than averaged. The risks are long quoted lead times, idle capacity between orders, and raw material shortages that stop a job on the day it should start.

In make-to-stock, the shop decides what to build from a forecast or a reorder point, builds in batches, and sells from finished stock. Standard fasteners, catalogue enclosures, consumables and spares are typical. Lead time to the customer is the time to pick and ship. The cost of a unit is usually a standard or an average over the batch. The advantages are fast delivery and level loading of the floor. The risks are cash tied up in finished goods, obsolescence when a design changes, and building the wrong mix when the forecast is off.

The choice is about where the stock sits and who waits. Neither is better in itself; the right answer depends on how standard the product is, how long customers will wait, and how much cash the shop can hold in finished goods.

Most 10 to 50 person manufacturers do both. The practical rule is to flag each item as MTO or MTS. MTS items get a reorder point and a batch size; a low stock alert creates a work order. MTO items get a work order from the sales order, with their own BOM revision and cost. A middle path, assemble-to-order, stocks sub-assemblies and finishes to order, which shortens lead time without stocking every variant. The ERP needs to handle both triggers and keep MTO job costs separate from MTS batch costs, or the margins on custom work disappear into an average.