Build to order - Inventory Management Model

A build to order system is essentially a pull or on demand production and inventory system which aims to produce and deliver products only on customer demand. This system can also be viewed as a Just in time production system which aims to operate on the principles of lean manufacturing, delivering components or products just in time when they are required thus eliminating wasted time and movement. This means that the end consumer dictates when and what products will be produced. A production order or kanban is only generated when a customer order is received and confirmed. This can be generated through an inventory/production management program or manually.

Some build to order items are also examples of single inventory decision cases, where production orders are for one off production items such as customized products or large items which have specific uses and are not mass produced.

The build to order system is usually reflected throughout the supply chain and suppliers also operate a similar on demand system, and information on consumer demand trends tends to be shared to better balance production and achieve efficiencies across the supply chain . This is done to minimize costs throughout the supply chain as some of the products made in build to order systems have expensive and hard to source components.

Examples suitable for a Build to order system

Not all products and industries are suited to adapt build to order systems, but some mainstream industries and manufacturing businesses do adapt a build to order system for some of their most exclusive or specialised products. The following products and scenarios are well suited to adapt a build to order manufacturing system as an economical way of delivering their product to market.

- High end motor vehicles and sports cars
- Aircraft manufacturing
- Special crafts made from rare raw materials
- High end luxury consumer products made from exotic materials
- High end jewellery
- Specialist medical and research equipment
- Turn key production plants and heavy machinery

As you can see these products and their industries supply a limited market or specialist group of customers which are only a very small portion of the general population and purchase these items sparingly and not every day.

Benefits of a Build to order system

Many businesses operate some or all of their production under this model, and have found many benefits, which include:

- The ability to produce products with high differentiation and customization
- Reduced production waste by knowing the exact demand for the product.
- Reduced work in progress and inventory throughout the supply chain
- Reduced inventory holding costs in both raw materials and finished goods
- Improved customer lead times and flexibility to adapt to consumer demand changes
- Improved cash flow for the business

Unfortunately one of the downfalls of this system is that some of these build to order products may have substantial lead times during periods of large demand as seen in mining machinery during mining booms and if a buyer cancels an order it may take substantial time to find a suitable buyer for the product as usually the market for these products is smaller.

       More lean concepts and terms