Stock and orders in one plant

The standard solution for a mixed plant

When a business makes some products to availability (MTA) and others to order (MTO), the standard solution combines the two:

• MTA products are protected by a stock buffer, replenished from consumption.
• MTO orders are protected by a time buffer, with due dates from the front-of-load.
• The MTO front-of-load is built on capacity dedicated to MTO.

Reserving capacity

What happens in an MTO plant when demand is far more than supply? The front-of-load grows, and quoted lead times grow with it. In an MTA plant, the same overload shows as falling availability. In a mixed plant, the two compete for the same capacity, so the front-of-load is divided:

• Option 1: a share of the capacity reserved for MTA and a share for MTO. Each side quotes and releases within its own share.
• Option 2: reserve capacity only for the MTA customers whose current service can’t be hampered; all other MTA customers get a due date from the front-of-load, like an MTO order.

And watch the short-term planned load of each side separately, each against its reserved capacity. Base the reserved capacity on the output the constraint actually achieves, not on its rated capacity: if the plant plans for capacity it doesn’t realise, both sides fall behind together.

One scale at the constraint

At the constraint, MTO and MTS jobs wait side by side. Which first? An MTO order has a due date; its status is how much of its time buffer is gone. An MTS order has no date; its status is how much of its replenishment level is missing, and that can change fast, because stock can go down quickly.

An example. On 1 March, three jobs wait at the constraint:

• a large MTO order for P3, due on 28 March, shipping buffer two weeks;
• an MTS order for P1: replenishment level 1,000, order 500, on hand 430;
• an MTS order for P2: replenishment level 300, order 100, on hand 106.

Red begins at 70% for both kinds.

On 1 March, the MTO order isn’t even inside its buffer: four weeks to the due date and a two-week buffer. P1 is 57% penetrated, P2 65%. So P2 first, then P1, and the MTO order last. On 10 March, P1’s stock has fallen to 200: 80%, red, now the most urgent. The priorities shifted in nine days, and only one number per job shows it.

The plant stuck at 60%

A maker of lighting products ran about 70% of its business to availability and 30% to order. The standard mixed solution was in place: stock buffers, time buffers, capacity dedicated to MTO, an order buffer for each sales order. Yet on-time-in-full was stuck in the 60s, even though:

• MTA availability was 95% and higher, and
• vendors delivered the MTO items 90–100% on time.

How? Look at the orders, not the products. By value the mix was 70:30. But by number of orders it was 50:50, and leaving out the month-end book-and-bill orders (mostly MTA), it was 40:60. Most customer orders contained MTO items, and many contained both kinds. A customer order is on time only when all its items are.

The gaps:

• MTO material stealing across orders.
• Broken synchronisation between sales orders and production orders: when an order was cancelled, its production order kept running.
• Known future demand for MTA items not acted on, so they were sometimes unavailable when an order needed them.
• The month-end skew: bill whatever is available, breaking the full kits of other orders.
• Branch stock-outs of MTA items lasting more than seven days after every month-end.

The modified approach

• See the entire order book as make-to-order, driven by due dates. MTA stock still exists, but each customer order is managed as a whole.
• Daily flow meeting on the order-level buffer penetration.
• Daily generation of production orders, and, just as important, daily cancellation of the excess. Rule: delete the latest production order. With about three weeks of lead time, some items reach early, but synchronisation is not totally lost and no capacity is spent on excess.
• Allocation by ageing: stock is allocated to an order at the central warehouse starting three days before its due date there.
• MTA stock at the branch is reserved three days before the due date, provided the order’s MTO items are allocated or in transit.
• No breaking of reserved full kits in the month-end rush: reserved material can’t be billed against any other order.
• A booking lock: no new bookings for a customer if a reserved full kit hasn’t been invoiced for more than 15 days.

On-time-in-full rose from the 60s to about 80%, and stuck again. The next step was ordinary buffer management: a Pareto of the SKU–vendor pairs responsible when allocation didn’t happen on time, and an improvement project on the top of it.

Check your understanding

Answer all five. Get four right to complete the lesson.

1. Capacity reserved for MTA and MTO should be based on…

• The rated capacity of the constraint
• The output the constraint actually achieves
• Last year’s sales split
• The forecast for the next month

Planning on unrealised capacity makes both sides fall behind.

2. On 1 March, the constraint should first run…

• The MTO order, since a named customer is waiting
• P1, the largest order
• Whichever order needs the shortest set-up
• P2, the most penetrated buffer at 65%

The MTO order isn’t inside its buffer yet.

3. The lighting maker had 95% stock availability yet about 60% on-time-in-full because…

• Most orders held MTO items, and an order is on time only if all its items are
• The vendors were unreliable
• Stock availability was measured wrongly, at the plant instead of at the branches
• Customers ordered too late

By order count the mix was 40:60, not 70:30.

4. When an excess production order must be cancelled, the rule is to delete…

• The oldest one, since it has waited the longest
• The largest one
• The latest one
• The one with the least work done

Some items arrive early, but synchronisation and capacity are kept.

5. The booking lock stops new bookings when…

• The customer’s credit limit is reached or payments are overdue
• A reserved full kit hasn’t been invoiced for more than 15 days
• The month-end target is met
• The front-of-load passes four weeks

It protects reserved kits from being left unbilled while new orders compete for stock.