Business Processes in Practice: Make-to- Stock vs. Make-to-Order (Apple Case Study)

dell-vs-appleA good example of a company that uses the make-to- stock strategy is Apple Inc. Apple uses the make- to- stock process for Macs sold in its Apple stores. The company first estimates the consumer demand for its Mac computers. It then calculates its available  manufacturing capacity and the quantities of raw materials it will need to build enough computers to meet consumer demand. Apple’s strategy is to purchase raw materials and reserve manufacturing capacity ahead of time to maximize the cost efficiencies of buying materials in bulk quantities and doing large production runs. Apple and its contract manufacturers then produce a specific quantity of each Mac model and ship them from the factory to the Apple stores and other retail outlets for sale. When customers come into an Apple
store, they expect that the computer they want to buy will be there and that they can take it home immediately after purchasing it.

 

Because Apple uses a make-to-stock strategy, the company must pay extremely close attention to both its retail sales and the amount of finished goods inventory it has in stock in order to estimate its demand as accurately as possible. If Apple overestimates the demand for a particular product, the company will be stuck with a large inventory of very expensive finished goods that customers
don’t want to buy and that will decrease in value while they sit on the shelf. Conversely, if it underestimates the demand for a product, customers who want to purchase the computer will be told it is out of stock. They will then have two options: place a back order and wait until the store gets resupplied with inventory, or shop for the product at a different store. Either outcome will make consumers unhappy and could result in lost sales.

In contrast, one of Apple’s major competitors— Dell—employs a make-to-order production strategy. Dell was the first company in the industry to build computers only after they had received a fi rm order and thus knew exactly what product the customer wanted. Because Dell does not have many retail outlets like Apple (although it has recently tested some retail partnerships), the company
relies primarily on telephone and Internet sales channels for the majority of their sales. In contrast to Apple customers, then, when Dell customers place an order, they anticipate that they will have to wait a few days for the computer to be produced and delivered.
After the customer places an order, Dell typically assembles the computer from raw materials it has on hand and then ships it directly to the customer.
Unlike Apple, then, Dell does not need to be very concerned with estimating demand for its finished products because it knows exactly what customers want based on customer orders. However, Dell must be extremely careful in purchasing raw materials and managing its production capacity. Because its production runs are very small—sometimes one computer at a time—it must estimate its raw material needs and production scheduling based on an unknown customer demand.
If Dell mismanages its production planning process, it is especially susceptible to an oversupply or undersupply of raw materials and shortages or idleness in production capacity. If Dell does not have sufficient raw materials or production capacity, customers will have to wait much longer for their computers to be shipped.
Conversely, if the company has excessive raw materials or unused production capacity, it loses money.
Although Dell’s customers are accustomed to waiting a few days for their computers to arrive, they probably will be upset if their deliveries are delayed for several weeks due to a shortage of raw materials or a backlog of production orders. Alternatively, Dell’s profitability will suffer if its production lines are idle or its warehouses are filled with unused raw materials.
Both Apple and Dell have chosen a production strategy that maximizes their profitability. Apple believes that by controlling the entire buying experience through their Internet and physical stores, they can attract more customers. This strategic objective drives Apple to place a much higher emphasis on having products available in the store when a customer comes there to shop, which increases the likelihood that she or he will make a purchase. In addition, Apple realizes significant cost savings through large, planned production runs and close coordination with retail sales data generated by their online and physical stores. For all these reasons, the make-to-stock production process is probably the best strategy for both Apple and its customers.
In the case of Dell, the make-to-order production process fits well with the company’s rapid assembly and standardized products. Dell’s customers are comfortable ordering a computer that they have never seen because they know that Dell uses high-quality, industry-standard components. They also trust Dell to ship them a finished computer in just a few days, and they are willing to wait
for it to arrive rather than pick it up in a store.

In essence, the preferences and behaviors of each company’s customers determine, to a great extent, the production process for each company. Apple’s customers want to touch and experience the product in a retail store, whereas Dell’s customers are content to
buy something over the phone or the Internet. Each company has optimized its production process to match both its specific set of customer requirements and its internal profitability goals and cost structure.

Source: Adapted from Magal and Word Essentials of Business Processes and Information Systems. John Wiley & Sons, Inc. (2009).

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