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ICIEVE 2019 IOP Publishing
IOP Conf. Series: Materials Science and Engineering 830 (2020) 032084 doi:10.1088/1757-899X/830/3/032084

Reducing customers' lead time using Make to Stock and Make

to Order approach

E Prasetyaningsih*, C D Ardianto and C R Muhammad

Industrial Engineering Program Study, Universitas Islam Bandung, Bandung,
Indonesia

*[email protected]

Abstract. This paper discusses about a company that adopts make-to-order strategy because
the company does not have enough fund to provide raw material. The raw material is ordered
when the order is received. It occurs a very long customer lead time due to the production
process must wait for the arrival of material. Consequently, the company cannot meet the
customer order at the due date, and the company should give a discount of 25 - 30% of the total
purchases. This research aims at reducing customer lead time by determining a decoupling
point. The result shows that the decoupling point is placed between the procurement of raw
materials and the manufacturing process. The decoupling point denotes a boundary between
the make-to-stock strategy in the previous process, and the make-to-order strategy for the
process afterwards. The lead time customer is then considered start from the decoupling point
to the due date.

1. Introduction
Companies that use make-to-order (MTO) strategy to response consumer demand faces problems of
raw material delays, because the companies order the raw materials after receive the customer’s order.
This will extend the lead time and the due date is then violated, so that the consumers are disappointed
and the company must pay a penalty cost. This problem can be overcome by sorting material that can
be ordered suddenly from material that can be stored. Consequently, the strategy used is a combination
of make-to-stock (MTS) and MTO.
This research discusses the reduction of lead time by combining MTS and MTO strategies by
determining the Decoupling Point (DP). In MTS / MTO system, a portion of the production system is
controlled by MTS strategy and completed in control of MTO strategy [1]. Production planning and
control in MTO strategy focuses on the time and/or sequence of operations, while the MTS strategy
focuses on preventing stock shortages at minimum inventory costs [2]. MTS strategy – a forecast-
driven – is separated from MTO – a customer-order-driven – by the strategic position of DP [3]. The
problem is where DP should be placed.
Research about MTO and MTS have carried out by many researchers. Nagib at al. state that the
food and beverage industry choose hybrid MTO-MTS and EOQ strategy to manage raw materials at
an optimal level [4]. The application of MTS-MTO hybrid consists of three levels, i.e. deciding which
product will be an MTO or MTS (level 1), determining MTS and MTO lot size (level 2) and sorting
and scheduling production orders (level 3). Bart and Teunter state that MTS-MTO hybrid production
system can save costs up to 65% [2]. Garn and Aitken propose an outlier detection algorithm based on

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ICIEVE 2019 IOP Publishing
IOP Conf. Series: Materials Science and Engineering 830 (2020) 032084 doi:10.1088/1757-899X/830/3/032084

special density measurements [5]. Time series requirement in MTS and MTO strategies are divided
into three groups, i.e. requirement with frequent low-volume includes MTS strategies, high volumes
dedicate to MTO strategies, and volumes that are in between are assigned to MTO or MTS strategies.
[1] propose two strategic of decision-making structure in hybrid MTS / MTO, i.e. choosing a product
delivery strategy and positioning of order penetrating point (OPP) for each product family by
considering the driving factors. The decision making tool for finding the location of the OPP is chosen
by the ANP method. Kober and Heinecke conclude that the MTO strategy is suitable for low and
volatile demand, while the MTS strategy is suitable for high and stable demand [6].
Jia et al. propose a flexible flow-shop (FFS) production model to reduce total inventory and
lateness [7]. The model divides FFS into make-to-stock (MTS) parts and make-to-order (MTO) parts
by applying a decoupling point. In MTS section, work is produced into semi-finished products and
then stored as inventory at the decoupling point. As soon as a customer's order is received, inventory is
released into the system, starting to be processed in MTO section. This shortens manufacturing lead
time. Mishra et al. find that the degree of Manufacturing flexibility varies with the position of the DP
in the supply chain, whereas the position of the DP varies across different types of business strategies
[8]. As such, MF is indirectly influenced by the business strategy. Daaboul state that the best mass
customization strategy is obtained if the positions of the Customer Order Decoupling Point (CODP)
and Product Differentiation Point (PDP) are determined simultaneously [9]. Rudberg and Wikner
develop a CODP typology into the dimensions of production and engineering to obtain a reliable order
promise process for mass customization [10]. CODP is defined as a point in material flow that adds
value that separates decisions made based on uncertainty from decisions made based on certainty
about customer demand, but is usually only used for activities related to production and distribution.
Here we adapt the typical CODP typology and show how engineering resources can be integrated with
the production process so as to consider the features of a mass customization environment. van Donk
show the relationship between Supply Chain (SC) and CODP locations, i.e. MTO, ATO, and MTS
strategies showing high levels in upstream, internal and downstream [11].
Hou and Wang determine the optimal position of CODP through numerical simulations [12]. The
optimal CODP position moves downstream after adding an intelligence module, thus shortening
response time to customer orders, increasing customer satisfaction, fostering customer loyalty and
increasing customer rigidity. Wikner and Johansson introduce a comprehensive classification scheme
for types of process-based decoupling points into eight types of strategic and tactical decoupling points
for designing flow [3]. van Donk states that the determination of DP's position is influenced by two
sets of characteristics, namely product and market characteristics, and process and stock characteristics
[13].
This study aims at reducing customer lead time by combining MTS and MTO strategies to
determine DP location. DP determination refers to van Donk [13]. This paper is organized as follows.
Section 2 explains the methodology, Section 3 shows the results, Section 4 discusses the results, and
Section 5 presents the conclusions.

2. Methodology
DP is determined by considering the characteristics of the process, stock, product and market as seen
in Table 1 [13]. The effect of each term on each characteristic of the DP position is shown in Figure 1.
Figure 1 must be interpreted as follows, i.e. irregular market conditions or specific products have an
upstream effect on the location of the DP, while short delivery time or high delivery reliability will
force the DP more downwards.

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ICIEVE 2019 IOP Publishing
IOP Conf. Series: Materials Science and Engineering 830 (2020) 032084 doi:10.1088/1757-899X/830/3/032084

Table 1. Determinant of the decoupling point [13].

Product and market characteristics Process and stock characteristics
Required delivery reliability Lead times and costs of steps in the (primary) process
Required delivery time Controllability of manufacturing and procurement
Predictability of demand Cost of stock-holding and value added between stock points
Specificity of demand Risk of obsolescence

Figure 1. Business characteristics classified according to their nature and influence on the DP [13].

3. Result and discussion

In this research, a T-shirt producer is taken as a case study where the production process is shown by
Fig. 2.

Manufacturing process
Overlock
sewing
Fabric cutting using

Customer
Supplier

cutting machine
Fabric
Procurement Bisband Line
patterning Bisband cutting Packing Delivery
Sewing sewing
using scissor
Screen
printing

Figure 2. Production process of case study company.

DP provides a boundary where inventory is determined by MTS or MTO strategies, in order to shorten
customer lead times. The result of DP locating is as follows.

3.1. Result
In this study, DP is determined by referring to van Donk as shown in Table 1, which considers the
characteristics of the product, stock, market, and process [13].

3.1.1. Product and stock. T-shirt products can be stored for a long time, not perishable product or not
outdated. However, the product is delivered after completed due to MTO strategy implementation. The
raw materials are ordered when customer order is received. The order lead time of the main raw
material, i.e. fabric, is actually 3 days, but often delayed up to 9 days. The extended lead time causes
delayed delivery of the finished product, so that the company must pay a penalty cost to compensate
the delayed delivery. The additional materials do not occur delay problems

3
ICIEVE 2019 IOP Publishing
IOP Conf. Series: Materials Science and Engineering 830 (2020) 032084 doi:10.1088/1757-899X/830/3/032084

3.1.2. Process. Figure 2 shows that the manufacturing process of the product begins with making
pattern of the body parts of the shirt, and the "bisband" on the fabric material. The fabric is then cut
according to the pattern that is made. The front and back of the T-shirt body parts are combined using
an overlock machine, and then “bisband” of arms and neck are sewn. The bottom of the shirt is then
sewn for neatness. The next step is to sort out the products into 2 groups, i.e. non defective and
defective products. The non-defective products are then packaged and deliver to customers.

3.1.3. Market. The company only produces 1 type of shirt with several sizes ranging from 30 to 42.
The customer orders are received every month with varying amounts.

Refer to the product, stock, process and market of the T-shirt, DP determination should consider as
follows:
 The arrival of fabric material often delays.
 T-shirt products only have variations in size, so that work in process (semi-finished products)
as a basic form to accommodate demand variations does not required.
 There are variations in the size of the shirt when patterning product.
Thus, the DP is the stock of fabrics raw material, located between the ordering process and patterning.
The fabric raw materials can be ordered before the customer order is received (MTS), while the
manufacturing process start from the patterning process to the product delivery is carried out after the
customer order is received (MTO). The DP position is shown in Figure 3.

Manufacturing process
Overlock
sewing
Fabric cutting using

Customer
Supplier

cutting machine
Fabric
Procurement Bisband Line
patterning Bisband cutting Packing Delivery
Sewing sewing
using scissor
Screen
printing
MTS MTO

Figure 3. DP position.

DP placement after procurement causes stock of fabric raw materials. However, these inventory costs
can be minimized by adopting EOQ method. The customer lead time is then considered start from the
DP to the due date. Applying DP reduces customer lead time from 20 days into 11 days, due to the
availability of the fabric material so that the order can be responded as soon as it is received.

4. Discussion
DP point availability will reduce the customer lead time so that the due date can be met. It causes the
company should not pay a penalty cost. However, availability of fabric material rises inventory cost.
When the inventory cost is less than the penalty cost, it will profitable, and vice-versa. In our case, the
penalty cost of Rp.44,200,000/year, while the inventory cost of Rp.44,100,000/year. There is just a
little difference between the penalty cost and the inventory cost, but meeting the due date is more
important because it will rise company reputation. Therefore, applying DP point will reduce customer
lead time and keep the company reputation.

5. Conclusion
The decoupling point will reduce customer lead time and the due date is not violated. It will profitable
if rising of the inventory cost is less than the penalty cost due to.

4
ICIEVE 2019 IOP Publishing
IOP Conf. Series: Materials Science and Engineering 830 (2020) 032084 doi:10.1088/1757-899X/830/3/032084

Acknowledgment
This research received no specific grant from any funding agency in the public, commercial, or not-
for-profit sectors.

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