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ERP Systems and the ETO Manufacturing Market Part Two: ETO versus Repetitive Differences

Written By: Predrag Jakovljevic
Published On: May 4 2004

ETO versus Repetitive Differences

Having outlined the above, it might be useful for us to recap the major differences between engineer-to-order (ETO) and repetitive/volume-base manufacturing environments throughout different phases of a product life cycle as well within various functional departments within a manufacturing organization. First of all, prior to any manufacturing, there is extensive work in the product definition phase (i.e. estimation, design, and engineering) before anything can be made, bought or delivered. However, the major difference is that within ETO companies the product design is an integral part of production (if not even afterwards, during the site installation and commissioning), whereas for repetitive, standard items the design is typically completed and handed "over the wall" to the manufacturing well before the production starts.

In volume manufacturing, product definition work is amortized (recovered) over the items' life cycles, which are often measured in thousands of items and over several years of commercial use. Whilst a possible time overrun here will effect the time-to-market of the product, (which is often the competitive advantage (strategy) in addition to lower costs for repetitive manufacturers), it has no effect on the overall lead-time of any particular sales, job, or project order, and is therefore not handled in the same way. Moreover, the extensive costs of product definition are absorbed into the company overhead or standard product costing, so that an overrun of costs can be managed in the context of a long term pricing strategy.

Project-based/ETO manufacturing is very different, as a majority of the total project lead-time and expenditure can come from engineering, which makes it crucial for the company to engineer correctly and maintain costs. Complex manufacturers produce products that are of high variation, have complex features and options, and vary in end user configuration. Each job is unique and the variables are based on client specifications rather than on the options from the stock. They consequently invest significant dollars in product design and have lengthy sales and manufacturing business processes, often requiring collaboration between the customer, sales representatives, and critical back-office experts.

ETO manufacturers focus on special jobs that have never been done before, or custom jobs that are similar to others but require extensive modification to accommodate customers' special requirements. Further, customer approval may stipulate many engineering changes and adequate information about these changes must be timely when released to manufacturing and purchasing, and sometimes even to the field service force. As a matter of fact, product design almost never stops, given customers' prerogative of changing their minds in the midstream, to a degree that they feel free to change specifications or add new requirements to the original orders, sometimes by directly instructing the supplier's manufacturing personnel and circumventing the proper channel of the sales and engineering department. Occasionally, the customer might attempt to play dumb and even refuse to pay for any changes to the original orders if the enterprise is unable to track all these change requests back to the initial order and prove him or her wrong.

Furthermore, since most projects have unique requirements, lead time of the product definition processes will directly impact on the delivery of the project, and will affect the contract. The company will go through it all over again on the next project, even if the product is similar to the previously delivered one. Thus, there is effectively little or nothing to amortize or recover the costs. For these reasons, far from being ignored, these "upfront" product definition processes need to be carefully planned and accounted for.

Moreover, sophisticated customer interactions (such as order/contract definition and management applications) are required, while customer service needs are also oriented toward hands-on contract management and cost reporting. Frequent changes force contract supplier engineers and subcontracted original equipment manufacturer (OEM) engineers to be in a constant collaborative communication throughout the design and production cycle of the unit. One of the most manual functions in a supplier organization have traditionally been the sell-side request for quote (RFQ) management (as opposed to standard price and discount lists in repetitive environments), which usually revolves around a few key expert individuals that have direct knowledge of the product or who can manually pull together the diverse information sources into a unified document, as contract proposals include quotations, pricing, detailed product information, data sheets, and computer-aided design (CAD) drawings. In complex ETO manufacturing, where the quality is a given, and while available capacities are on par, what makes the winner is the ability to set a competitive price. There is a huge difference between winning business and winning business that is profitable to accept and that is a win-win situation for both the customer and the provider.

On the other hand, in almost all industrial manufacturing segments, the pressure to reduce lead times has become a constant and ever-expanding concern. Depending on product complexity, some parts or sub-assemblies might be quoted immediately, while others have to be highly specified. Developing a contract proposal requires many levels of checking and re-checking customer process requirements and facilities capabilities, as well as preliminary design work and sourcing of specific components or materials. The process typically goes through much iteration every time the customer uncovers a new requirement or constraint. The labor-intensive nature of this process has often resulted in lengthy estimating cycles, which have in turn often translated to lost business opportunities.

This is Part Two of a three-part note.

Part One defined the terms and provided background information.

Part Three will make user recommendations.

Product Configurators May Play the Role

By harnessing an enabling technology to make everybody work smarter rather than harder, complex manufacturers could, in some instances, reduce the time it takes to create contract estimates. To that end, modern product configurators have become the pivotal enabling technology for simplifying complex ETO operations in the direction of mass customization, providing the ability to more easily configure individualized products and services at the point of sale (POS) with integration to back-office systems. Providing customers with exactly what they want is not exactly a new concept, but the idea of giving the customer ever-expanding range of choices as early as possible has become the center of many various industries' customer-oriented activities, given that getting an accurate, customized product to the customer more quickly fosters competitiveness.

In general, product configurators are software tools that streamline order entry process by asking the customer to select from a set of predefined options associated with a generic product line, and then apply predefined rules with constraints to correctly configure the particular end product. The configurator then populates the attributes of the newly configured end item (called the variant product), tests for any conflicts, and generates the variant product with appropriate BOM, routing, and pricing based on preconceived rules and calculations. As product configurators have evolved to include even more sales, marketing, and financial functions tangential to the product per se (e.g., pricing, cost analysis, sales commissions, available-to-promise [ATP], order status, etc.), the term "sales configurator" has been used to increasingly to reflect their expanded role. It may more accurately describe their extended role as tools that assist salespeople with not only building viable products, but performing related tasks, such as proposal and quote generation. Still, configurators may have only limited usefulness for the most complex, unique "one off" project-based environments.

In any case, the ETO-oriented systems must facilitate the near real time transfer of information and complex product knowledge for collaboration across the extended enterprise, and should especially be suited to organizations that seek to maintain complex selling relationships, such as businesses whose procurement and sales functions rely on subcontractors, channel partnerships or a distributed sales force. To that end, a manual process that took anywhere from a day to several days should now be accomplished in about one minute with the appropriate use of technology.

In volume manufacturing, concurrent engineering means getting teams together. According to APICS Dictionary, it is "a concept that refers to the participation of all the functional areas of the firm in the product design activity. Suppliers and customers are often also included. The intent is to enhance the design with the inputs of all the key stakeholders. Such a process should ensure that the final design meets all the needs of the stakeholders and should ensure a product that can be quickly brought to the marketplace while maximizing quality and minimizing costs". Also called co-design, concurrent design, early manufacturing involvement, parallel engineering, simultaneous design/engineering, team design/engineering, integrated product development, participative design/engineering, quality circles or design for manufacture (DFM), concurrency is mostly about teamwork and the sharing of knowledge. In project manufacturing, however, concurrency goes a mile further by running design, manufacturing, and commissioning simultaneously, since it is often the only way to satisfy the customer's deadline.

ETO and project-oriented ERP buyers should therefore ask prodding questions about how the systems they are evaluating handle concurrency. For example, can the design department release a partial BOM for manufacturing to work on, and then add to it or modify it later when they are sure of all the facts? This capability is sometimes referred to as "progressive engineering", which is the ability to handle items that are part of the project but still undefined—they can nevertheless be included in the project work breakdown structure (WBS) and the application will plan around those items without losing the integrity of the structure.

More Differences from Repetitive Manufacturing

In rigid systems for repetitive manufacturing, implementing a change to a BOM or routing would require canceling all the affected open, closed, and in-progress orders and re-creating them with the new information. This in itself can create countless hours in administering the ERP system. As mentioned earlier, project manufacturers have frequent changes imposed upon them in the midstream, and, if the ERP system can cope at all, it should be able to provide the rationale to the following "what if" questions—"what is the cost difference between the designs?", "what is lost and unusable?", and "what is still good or could be reworked?".

Consequently, the BOM and the way it is handled are different for project manufacturing to that of volume manufacturing, and not only in terms of deep, multilevel ETO BOMs versus flat BOMs for repetitive items. For one thing, a BOM in a project environment is not limited to standard factory items (such as widgets), or even items used to make the product. It is often even preferable to be able to create a BOM without using part numbers for some components, since these are only purchased to a particular project (and not received into the stock at all), whereas the finished unit is often shipped straight from WIP, again without being reported to the inventory. Further, in order to commission a project, consumables and sundry items, tools, jigs, and fixtures may well be required. Often, on surface, this may appear to be supported by a volume-based ERP system that recognizes that a certain tool must be available to run an operation step in the routing on a certain machine in the factory. Thus, to remove any confusion, here is an example of making machine tools. When the time comes to commission the machine, users may well require a cement mixer and cement in order to bed the machine down—but only after the machine is already "made" and delivered from the plant floor—and of course these items are required at the customer's site, not the factory floor. Another example could be boiler manufacturers that require welding, painting or corrosion-protective work, at the installation site.

Also related to the above, at the core of ETO/Projects functionality is often a "service item" feature that allows the system to define and manage service products (which are often activities rather than physical stock items) such as engineering, education, installation, and consulting. Similar to the way BOMs aid production planning for physical products, the service item aids scheduling and capacity planning for services. This brings us to commissioning and installation, and service and support activities that come post manufacturing. Project manufacturers may indeed have to put extensive planning and effort into what happens after work in the factory is finished.

Staying with our earlier example, a manufacturer of boilers, may have to involve contractors, testing agencies, haulers, and extensive labor, all to commission the project. Yet volume-based manufacturers may see things in a different light. They presume that product is commoditized, since it can be distributed from finished goods inventories to users, resellers, and other manufacturers who know what to do with it. Their traditional lead-time calculation only counts up to final assembly, while, as previously mentioned, the design typically ends before the production starts (unless we are talking about some design changes due to such as recalls or design refinement). On the other hand, the ability to track warranty and provide aftermarket services, and manage spare parts with remote inventory tracking (for example parts stored on service trucks) would be additional gauges of any ERP system's strong fit for project-based and service industries.

This concludes Part Two of a three-part note.

Part One defined the terms and provided background information.

Part Three will make user recommendations.

 
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