The make-to-order or make-to-stock decision is an important issuefaced by firms in many industries.In the existing literature,optimization models relatedcost comparisons of making product to stock versus making it to orderhave been widely developed.Motivated by the problem faced by amachinery company, weexamine the issue from a new different viewpoint and formulateservice-maximization models with inventory cost budget constraint. We compareand analyze order fulfillment performance measures for the two differentproduction control systems. The goal is to identify the key influencing factorsand devise a production strategy that maximizes service performance subject toresource constraint. We show that the MTO production control system ispreferred in the production system with low component values and long componentprocessing times and high value and short lead time in the final assembly stage,while the MTS production control system is applicable to the production systemwith high component values and short component processing times and littlevalue and long lead time in the final assembly stage. 

Key words:Order fill-rate; Average order processing time; Inventory costbudget; Make-to-order; Make-to-stock 

1. Introduction

There is intense pressure onorder fulfillment performance in the increasingly competitive market. At thesame time companies are subject to various resource constraints. For any givenproduction system, what is the probability a demand can be satisfied in a giventime window? What is the average customer waiting time or order processingtime? A key challenge for manufacturing companies is the efficient design ofthe production system. Some firms adopta make-to-order strategy to reduce inventory related costs. However, otherfirms follow a make-to-stock strategy to reduce production runs and ensure a quick response time tocustomers.

This paper concerns thecomparison and analysis of order fulfillment performance measures for twodifferent production control systems: make-to-order versus make-to-stock. Weformulate service-maximization models with inventory cost budget constraint todetermine the right base-stock level for each component in the MTO system andfor the final product in the MTS system and to identify the key drivingfactors.

The make-to-order or make-to-stock decision is important formanufacturing firms. It is commonly faced by firms in many industries, such ascontract manufacturer (Kumar et al.,2007), plastic toys manufacturing firm (Rajagopala, 2002), food company (Van Donk ,2001; Soman et al., 2004), steelmill (Kerkkanen, 2007), semiconductor plant (Chang et al., 2003), personal computermanufacturingfirm (Vidyarthi et al., 2009).