First, You Must Know What “Produce-to-Demand” Is
Everyone seems to have a different understanding of what Produce-to-Demand really is. First of all, let's explain what it's not. Produce-to-Demand is not make-to-order. Similarly, it is not make-to-stock in its purest form. Rather, Produce-to-Demand is a hybrid that combines elements from both worlds to find the “sweet spot” between them, a high-speed sensing of demand buffered by small stocks of finished goods inventory.
In the diagram below, you will see how Produce-to-Demand partially short-circuits traditional planning flow by entering inventory and customer order information directly into the detailed production schedule of the plant.
In the following diagram, the traditional production environment is compared with a Produce-to-Demand, high-velocity supply chain. Traditional production makes large batches of inventory relatively infrequently, which creates large average cycle stocks of finished goods. This typically means that a 2 - 3 week supply of finished-goods inventory exists well in advance of demand. In the Produce-to-Demand environment, frequent production more closely meshes with shipments.
This strategy not only reduces cycle stocks, but permits the reduction of safety stocks because more product can quickly be made if orders come in at a rate higher than expected.
For example, a high-volume consumer products company that truly has a high-velocity, low-cost supply chain ships to its customers 1 - 3 days from the receipt of the order has 2 - 4 days of finished goods inventory. The production facility has line utilization of about 60% in a three-shift, five-day schedule. This, of course, leaves available space for volume fluctuation and significant emergency capacity over the weekend when more product is needed almost immediately.