Understanding Build‑to‑Stock Production: When and Why to Pre‑Produce Inventory

"Build to stock" is a production system by which stock is produced to a fixed schedule, rather than in response to demand. In some cases, build to stock can literally mean producing enough units to fully stock warehouse capacity. In other cases, it can simply mean building a fixed number based on expected demand.

There are several situations where this system can be appropriate. One is where the demand for the product is highly predictable or has a seasonal element. For example, a Halloween costume company may produce a fixed number of costumes in the run-up to Halloween, rather than waiting until late October to see if demand increases.

Another situation suitable for build to stock is where there are significant economies of scale for continuous production of the same product. For example, a factory that uses molding may face high costs each time it switches between different products, as it will need to change molds. It therefore makes sense to produce as many units of one product as it can store rather than switch back and forth in line with short-term demand.

Although most examples involve long-term storage of products, there are exceptions. A fast food restaurant will, during busy times, often cook as many of a product as it can, rather than wait for an order. This is because the potential cost of having unsold stock left over, taking into account both the actual cost and the likelihood of it happening, is lower than the potential lost business if delays in production cause a backlog and deter customers.

The contrasting approach to build to stock is build to order. This means that some or all of the stock is only produced once a firm order has been placed. The benefit is that there is no chance of being left with unsold stock or unnecessarily clogging up a warehouse. The drawback is that there is an inherent added delay between a customer deciding to make a purchase and the goods being available.

Most manufacturers use some blend of build to stock and build to order. This can involve both the quantities produced at different times of the year, and the production process itself. One of the most notable cases of such a hybrid approach is in auto manufacturing, where vehicle chassis may be manufactured in bulk on a build to stock basis, but the final car is built to order once a customer makes customization choices.

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By John Lister

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