Write your own personal statement or comment with the essay below with each question.
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?
In an article in undated and anonymous article in Lean-Manufacturing-Japan, the author defines Make to Order as "MTO (Make to Order) is a manufacturing process in which manufacturing starts only after a customer's order is received. Forms of MTO vary, for example, an assembly process starts when demand actually occurs or manufacturing starts with development planning. (Lean-Manufacturing-Japan)
The author goes on to add, "Manufacturing after receiving customer's orders means to start a pull-type supply chain operation because manufacturing is performed when demand is confirmed, i.e. being pulled by demand. The opposite business model is to manufacture products for stock MTS (Make to Stock), which is push-type production. There are also BTO (Build to Order) and ATO (Assemble To Order) in which assembly starts according to demand." (Lean-Manufacturing-Japan)
"In a make to stock agreement, the buyer (retailer) is purchasing items prior to knowing customer demand, based on a forecast." (David Simchi-Levi, Philip Kaminsky, Edith Simchi-Levi. (2007). Designing and Managing the Supply Chain, (3rd ed.), p. 125).
In one, MTO, there is a known sales quantity ordered. In the other, MTS, the order is based on a forecast.
The buy-back contract decreases the risk for the manufacturer. Under a revenue sharing contract, the manufacturer has a financial interest in the product sales.
If the present contract arrangement is not working, a contract audit may be required to locate specific areas of weakness.
2. What are the advantages and disadvantages of each type of contract?
According to authors Simchi-Levi, Kaminsky, and Simchi-Levi, under a revenue sharing contract, the buyer (retailer) pays a reduced wholesale price, and has an incentive to increase their order, while the manufacturer receives a percentage of product revenue.
Under a buy-back contract, the manufacturer agrees to buy back unsold goods from the (buyer) retailer for an agreed upon price. The buyer/retailer has an incentive to order more pieces, but the supplier's risk clearly increases. The benefits of a buy-back contract are:
1. It increases the buyer's order quantity
2. It decreases the likelihood of out of stock, and
3. It compensates the supplier for the higher risk.
3. What type of contract would you choose? Give reasons for your decision.
As a businessperson, I would probably go with the revenue sharing contract. It seemingly provides more stability by ensuring profits for both the manufacturer, and the buyer/retailer. A smaller consistent profit margin is more desirable than having to pay a manufacturer back of all the items do not sell.
A revenue sharing contract would also help to forge stronger ties between your company (buyer/retailer), and your manufacturing partner. In the event of a shortage of materials used for certain products, the manufacturer would probably lean towards producing your desired products because they have a financial stake in your products.
References
Anonymous. Lean-Manufacturing-Japan. (n.d.). MTO (Make To Order) Retrieved from
https://www.lean-manufacturing-japan.com/scm-terminology/mto-make-to-order.html
Simchi-Levi, D., Kaminsky, P. & Simchi-Levi, E. (2008). Designing and Managing the
Supply Chain, (3rd ed.).Chapter 4, Supply Contracts. Power Point presentation. McGraw-
Hill/Irwin. Retrieved from
ind.ntou.edu.tw/~ericting/download/SCM/Simchi-Levi/3e/Chap004.ppt
Simchi-Levi, D., Kaminsky, P., & Simchi-Levi, E. (2007). Designing and Managing the
Supply Chain, (3rd ed.). McGraw-Hill Education.