ETO Manufacturers Issue a Challenge to ERP Vendors

Perhaps you may have not heard the term engineer-to-order (ETO) before, but perhaps your business is one of thousands that designs and builds custom equipment that is very precise, adheres to very specific tolerances, is highly technical, and produces low volume and, generally speaking, expensive products. Some examples of such products include ships, aircraft, production machinery, etc.

The typical ETO organization reflects a unique style of manufacturing—they design products to customer specifications, using a unique set of item numbers, bill of materials (BOM), and routings. Business is usually awarded to an ETO manufacturer based on estimates and quotations. Products can be complex, with long lead times and requiring a number of complex subassemblies to build.

Recently a paradigm shift has occurred in the realm of manufacturing, and ETO organizations are leading a call to change as a means of business survival.

ETO Manufacturing Challenges
Unlike standard manufacturing products, in ETO manufacturing environments, the customer is heavily involved throughout the design and manufacturing process. Constraints in the ETO manufacturing process include frequent engineering changes and long lead times from purchasing vendors that can span months—even years. Raw materials themselves are not purchased for inventory purposes, but for a specific phase of the overall manufacturing cycle. Because ETO manufacturers treat each job as a project, all costs and materials are reported to the actual work order and are further compared to the original estimate and quotation. In many cases, once the production phase is complete, the product is shipped to and assembled at the client’s site. Also in many cases, aftermarket sales services continue throughout the life of the product.

Requirements Differ between ETO Manufacturers and Discrete Manufacturers
The ETO manufacturer is faced with maintaining a business model that requires skilled, experienced, and knowledgeable tradespeople who are able to design innovative solutions to complex problems. According to a report by the National Association of Manufacturing in November of 2005, a generation of tradespeople is slated for imminent retirement, and the fewer numbers of young people enrolling in trade schools represents a challenge heading into the post-boomer economy of the early 21st century.

Another area where ETO manufacturing distinguishes itself from its discrete manufacturing counterpart is here: while discrete manufacturers have placed greater emphasis on manufacturing products offshore, ETO manufacturers have actually focused on designing, engineering, and producing products domestically.

ETO and Discrete Manufacturing Differences

ETO Requirements Discrete Requirements
long lead times short lead times
quoting estimates selling prices are established
managing  expenditures and cashflow standard costs parameters
local manufacturing offshore manufacturing
custom BOM-based on one-time project production BOM used continuously
ability to recall old estimates work order history

What ETO Manufacturers Would Like to See in Vendor Solutions
In attempting to address some of the challenges they will potentially face given the imminent loss of expertise mentioned above, ETO manufacturers are looking to technology and to software vendors to fill the void. They would like vendors to incorporate the following key features unique to the ETO environment into their software solutions:

  • PDA /hand-held devices—functionality for on-site, mobile employees

  • ERP systems that are project oriented—that indicate due dates, key deliverables, and milestones displayed in Gantt format

  • the ability to manage materials and schedules at subcontractors

  • BOMs that can be used as a basis for production control, but for the purpose of estimates

  • ERP systems that are not only schedule- and date-driven, but that include task and job time estimates

  • the ability to link BOM, purchasing, and scheduling modules with AutoCAD

  • integration between QA, purchasing, manufacturing, and inventory management; to have alerts when any non-conforming material (NCR) is identified

  • integrated revision control through any engineering BOM and drawings with revision control identified

  • integration of alternate parts when there are shortages in inventory

  • project reserve inventory management, which should provide the ability for customers—especially those with government project costing and tracking requirements—to purchase inventory with project funds, track its use across individual orders within that project, and report on the actual costs throughout the life of the project

  • improved long-lead item processing, which should allow customers to purchase their long-lead items early in the project, and then assign them to the appropriate jobs as the project structure matures

A Final Thought
In the article Information, Information, Information (Business Excellence Magazine, Sept. 2007), T.R. Cutler wrote

“Project-based or ETO (engineer-to-order) is commonly used to describe a custom manufacturing process, yet is rarely described with real world differentiation. Few MES (manufacturing execution systems solutions are specifically focused on meeting the needs of this challenging manufacturing market. Estimating costs to maintain a decent margin is often one of the great complexities in the ETO environment. Project-based cabinet makers, for example, may have never built a one-of-a-kind item before or have to add items once they are on the production floor, and have to accurately guess, all the possible costs variations.”

Cutler’s observation exemplifies some of the key challenges that ETO manufacturers face, as most ERP solutions are not designed to adequately address the constraints of the ETO environment. Fortunately, the paradigm shift in the manufacturing world is now bearing fruit: some ERP solutions are beginning to tackle the needs of ETO manufacturing requirements.

If you would like to read about ETO software vendors, TEC’s Vendor Showcase is an excellent place to start.
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