Summary

Product Stocking in Demand Fulfilment

Demand Fulfilment Process

Through the example of Nestle’s Maggi, you learnt about demand generation and the fulfilment processes in
an organisation.

Demand generation is a discipline within the marketing domain that focuses on changing consumer behaviour
and generating interest in their mind regarding your products.

Demand fulfilment is a discipline within the supply chain domain that focuses on fulfilling the demand for
your products.
● The demand fulfilment process calculates the first promise date at which the orders could be delivered
to the customers, thereby influencing the order lead time and its on-time delivery.
● The first promise date is calculated after taking into account the availability of the following three
types of resources:
a. Men
b. Machine
c. Material
● The demand fulfilment process ensures that when a customer wants to buy a product, that product is
readily available to that customer.
● The demand fulfilment process has the following three components:
a. Demand:
■ If there is no demand, then there is no need to fulfil that demand. Another part of
demand is predicting its future through a forecast.
■ Demand can easily be forecasted through the use of modern-day tools provided by
companies such as SAP.
■ One such forecasting tool called Manugistics is used by Nissan Canada Inc.
b. Product stocking:
■ To fulfil demand, sometimes, companies prefer stocking their products in advance.
■ Certain advantages and disadvantages are associated with stocking an inventory. (You
will learn about this later.)
c. Order promise:
■ There is an unsaid promise that companies make to most of their customers, which is to
provide products to them.
■ In some instances, companies can choose not to provide their products to a certain set
of customers. (You will learn about this later.)
■ Order promising takes into account the demand for and the inventory of a product as
well as its associated lead time before making a promise to the customer.

The three components of a demand fulfilment process are as follows:

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 Need for Product Stocking
There are several reasons for product stocking. Some of these reasons are as follows:

1. Prevent loss in sales:

a. While people are attracted to a particular brand, they might switch to its competitor if their
preferred brand is not available in the market.
i. If Maggi is not available, then the probability that customers would buy Yippie or Top
Ramen rather than returning empty-handed increases further.
b. Suppose you were interested only in Maggi and, therefore, returned empty-handed.
i. From Nestle’s perspective, there is still a loss in sales that they would want to reduce or
eliminate.

2. Safety measures against demand fluctuations:

a. Demand fluctuations can happen due to internal or external factors. However, the hard truth is
that fluctuations occur in the demand for almost all the products.
b. The inventory provides a buffer to safeguard against demand fluctuations. Some of the reasons
for fluctuations are as follows:

i. Meeting variations in production:

1. Every production facility goes through a routine check-up. This check-up is
done at a fixed duration. During these check-ups, the production capacity
drops.
2. This can be the case for Maggi as well; therefore, the supply chain team informs
the sales team in advance regarding any such check-up or maintenance.
3. The sales team depends on the finished Maggi inventory to sell Maggi to outlets
temporarily.
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 ii. Catering to seasonal demand:
1. Even though it is hard to believe, Maggi is a seasonal product. It sells more
during winters than in other seasons.
2. During winters, to cater to the sudden spike in demand, it seems more logical
for Nestle to have a finished stock of Maggi that can easily be pushed into the
market.

3. Economies of scale:
a. Transporting more goods over the same distance reduces the per-kilometre transportation
cost that is charged by transporters.
b. Thus, companies can either choose:
i. To stock goods and transport them, thereby saving on the transportation cost; or
ii. Not to stock goods and transport lower quantities but frequently, thereby saving on
the inventory holding cost.

4. Taking advantage of the price increase:

a. Producing Maggi requires certain raw material. If Nestle’s supplier decides to increase prices
in the future, then it has the chance to procure more raw material before its prices increase.

The following stocking strategies can be deployed by organisations:

1. Make-to-stock (MTS)
2. Make-to-order (MTO)
3. Available-to-stock (ATS) or Assemble-to-order (ATO)
4. Configure-to-order (CTO)
5. Engineer-to-order (ETO)

Traditional Product Stocking Strategies

Make-to-stock (MTS):
● Under MTS, products are manufactured to be stored in inventory before being sent for sale.
● Products are manufactured based on the sales forecast for a specific time in the future
● The idea is to match the forecasted customer demand with the production and stocking of goods in
inventory.
● By manufacturing products before the customer order is received, MTS does not allow any type of
product customisation or variation from the customer’s side.
● All the sales orders that are received by the organisation are fulfilled from the inventory.
● Under MTS, products are pushed by the companies into the market based on the forecasted demand
rather than the customer demand.
● MTS is hugely popular in the fast-moving consumer goods (FMCG) industry and the fashion industry.

Make-to-order (MTO):
● Under MTO, the production of goods starts only when the sales order is received from the customers.
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 ● Since the product is prepared after the sales order is received, the lead time increases heavily.
● To compensate for the high lead time, companies need to have an extremely rigid production in place.
This rigid process helps the companies to produce goods within a shorter period of time.
● By manufacturing products only after receiving orders from the customers, companies are able to
provide a high degree of product customisation and variation.
● Under MTO, products are pulled by the customers in the market because the production is based on
the customer demand.
● MTO is highly popular among the companies that sell expensive products, where the brand pull is so
high that the customers are willing to wait for a long time to receive their products. Some of the
examples of such companies are Airbus, Boeing, Mercedes and BMW.

Hybrid Product Stocking Strategies

Available-to-stock (ATS) or Assemble-to-order (ATO):

● ATO is a hybrid of MTS and MTO, which provides the advantages of both strategies and
simultaneously neutralises their cons. Thus, it can be called either available-to-stock (ATS) or
assemble-to-order (ATS).
● ATO vs MTO and MTS:
○ ATO is similar to MTO in the sense that products are made once the company receives the
customer sales order.
○ However, it differs from MTO and draws a parallel with MTS in the sense that the company is
able to deliver the products much faster even after offering a respectable degree of
customisation to the customers.
● Under ATS, only the components of the bigger product are made and stocked in advance. These
components are then combined to form a single product before the sale.
● Consider the example of the brand Gillette (owned by P&G), which manufactures razors and blades.
○ The company sells blades in specific packs that can be of varying sizes including 2–12 blades or
even more.
○ The company rarely sells razors as a stand-alone item; instead, it sells a pack of a razor with its
blades.
○ The aforementioned packs are known as packaged kits in supply chain terms and can be
customised to varying sizes once the components (razors and blades) are available.
○ Thus, the components (razors and blades) are prepared in advance and then assembled into
kits whenever required.
● A similar strategy is followed by car manufacturers who usually manufacture components and sub-
assemblies such as chassis, power trains and engine before the customers place their orders.
○ Car companies then assemble the components into a single unit (car) once the customer order
is placed.
○ This enables companies to provide the desired interior and exterior colour options based on
the customer order without changing the engine or chassis.

Configure-to-order (CTO):
● CTO, which is similar to ATS (or ATO), is also a hybrid of MTS and MTO.
● However, the difference lies in the higher degree of customisation offered by CTO than by ATO.
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 ● CTO can be used to create custom-made products in large quantities according to the specifications
and requirements of the customer.
● Consider the example of Dell, which makes desktop computers. These computers are sold either to
individual customers or big and small enterprises that need desktops for their office employees.
○ Such companies can place an order with Dell with the following type of requirement:
■ Twenty computers with 36-inch monitors are to be placed in a cement control room;
the processor and other technical specifications are also provided by the company to
Dell.
■ Dell already has components in its stock. It simply assembles them into final units and
provides 20 such computers based on the same specifications to the company.

Engineer-to-order (ETO):
● Under ETO, the product is designed, engineered and finished after the customer sales order is
received by the company.
● The specifications provided by the customer are highly detailed and require a very high degree of
designing and engineering efforts from the company.
● The specifications are very detailed and complex such that the customer and the manufacturer work
closely with each other until the final product is ready.
● ETO is suitable for areas where a very high degree of complex customisation is required, such as in
defence equipment and printed circuit manufacturing.

Choosing the Correct Product Stocking Strategy

The table given below depicts the product stocking strategy that should be used under specific circumstances
to achieve organisational goals.

Stocking Strategy Product Product Lead Time Inventory Holding Types of Industries
Customisation Cost in Which It Is Used

MTS Low Low High FMCG, commodity,

food and fashion

MTO High High Low Aircraft and luxury

cars

ATS or ATO Medium Medium Medium Dell PC

manufacturing and
kitted items

CTO High Medium Medium Enterprise

solutions

ETO Very high Very high Low Windmills and

turbines, etc.

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