In today's dynamic manufacturing industry, companies are feeling the squeeze of fierce competition, as goods are being produced more cheaply in developing countries. Because of this, global sourcing for parts is a huge factor in cost reduction.
In the project-based nature of the engineer-to-order (ETO) world's manufacturing processes, specific parts are needed at precise times. As well, because ETO manufacturing must meet stringent milestones and deadlines, it is critical that firms obtain parts on time. Otherwise, project costs go up, timelines are extended, and budgets are blown.
How can these manufacturers mitigate the pressures of this competitive landscape? Supply chain management (SCM) can play a vital role in an ETO manufacturing environment, enabling milestones to be met and parts to arrive on time so that production can continue on schedule.
This article details how SCM helps firms that manufacture ETO goods, as well as how SCM integrates with ETO to improve business processes.
The Role of SCM in ETO Firms
The ETO environment is a very detailed type of manufacturing because it involves many changes in the engineering and design of a product throughout its production. In this manufacturing environment, orders are based on contracts as opposed to work orders, which means it is crucial that the manufacturer meets its project deadlines.
ETO enterprise resource planning (ERP) software manages project deadlines and milestones within the manufacturing environment. However, with today's increasing amount of global sourcing, additional functionality is required, and this is where SCM software comes into the picture.
Because precise components need to be routed from different sources during the process of designing and manufacturing of the product, suppliers need to be made aware of the product requirements in enough time to be able to deliver these requirements to the client.
How can suppliers be linked into the operations of the manufacturing firm, which can make demands on a whim?
How SCM Software Components Relate to the ETO Manufacturing Environment
The main modules of SCM software include the following:
Warehouse management system (WMS)—enables firms to optimize methods of storing and moving inventory through the warehouse.
Transportation management system (TMS)—enables transportation firms to manage and optimize any mode of transportation.
International trade logistics (ITL)—helps organizations with the logistics of importing and exporting, the finances related to these activities, and collaboration between firms across multiple locations.
Supplier relationship management (SRM)—manages the relationships between suppliers, distributors, and manufacturing firms. SRM is one of the key features that enables manufacturing firms to source products quickly.
Demand management (DM)—forecasts how much product to move through the supply chain, how much product to produce, and how much product will need to be produced in the future, based on historical data.
Supply chain analytics—enables supply chain managers to create work-arounds if problems within the supply chain occur. Supply chain analytics is comprised of supply chain optimization, supply chain event management (SCEM), and production and supply planning.
Order management—enables suppliers (or manufacturers) to take an order, search within their inventory to see if the item is available, and ship the item to its final destination.
SCM software integrates into the ETO software infrastructure, enabling manufacturers to source goods from multiple suppliers. Because of the project-based nature of ETO manufacturing, the need for different and multiple components, as the engineering of a product changes, is essential for the manufacturing project to succeed.
Here's a look at how the seven main SCM modules can be applied to the ETO manufacturing environment:
Using warehouse optimization techniques built into the software, the WMS will facilitate the quick movement of goods coming into the manufacturing environment in order to get the goods to the workstations as soon as possible.
The TMS will enable ETO manufacturers to obtain the components as quickly as possible by choosing the most appropriate means of transportation. Also, if a transportation route is blocked, the TMS will help drivers find an alternate route, which ensures and improves delivery times, and enables the project costs of the ETO product to fall within a tolerable range.
The SRM software will choose the appropriate supplier. (A detailed example is shown below.)
Finally, because multiple orders are being delivered to the manufacturer at the same time as engineering changes are happening throughout the design of the good, the order management system will integrate with the ETO software to send out the appropriate orders to each supplier. This helps to ensure that suppliers send the correct components needed for ETO production.
Let's look at an example that illustrates the SCM process involved in ETO environments.
Figure 1: SCM at work in an ETO manufacturing environment.
Figure 1 represents a typical manufacturing situation. However, because of the nature of an ETO environment, precise components are needed quickly, thus putting pressure on suppliers to deliver components on time so that the manufacturer can meet its project deadlines.
In the above diagram, we will consider Supplier 1 a dedicated supplier, meaning that it usually provides the components to the manufacturer, and Supplier 2 up to Supplier N will be considered new suppliers.
In this example, let's say that Supplier 1 falls short on the order, creating a long lead time for the manufacturer—an unacceptable situation due to project deadlines. Whether the manufacturer obtains only part of the order or none of the order, it will have to choose another supplier, since deadlines need to be strictly adhered to in an ETO manufacturing environment. And let's say Supplier 2 has the component the manufacturer needs and can deliver it in a shorter time frame.
In this situation, let's examine how SCM software can allow the manufacturing firm to come out on top:
Having an SRM system in place, the manufacturer can see which supplier has what supplies, when they have them, and the lead times required to get the supplies to the manufacturer. The manufacturer can also see what suppliers have penalties for not delivering on time, and which suppliers can deliver the products to it right now.
The SRM software enables the manufacturer to choose the next appropriate vendor when the one it originally ordered components from cannot deliver for whatever reason. As shown in figure 1, if the first chosen supplier defaults on delivering the order, the SRM system will loop back to choose the supplier next in line. Once a supplier delivers the components in time to meet the project deadline, the manufacturer can finally produce the good and deliver it to the final destination.
The order management system can leverage the integrated functionality of the SRM system so that even before the order is sent out, the system can search for suppliers that can deliver the goods.
The TMS can integrate with the SRM system to ensure delivery of the products falls within acceptable tolerance levels of the project's budget, factoring in the continuing rise in fuel prices. This is done through transportation network optimization. (For a more information, please see the article Transportation Management Systems: The Glue of the Supply Chain.)
Supply chain analytics enables manufacturers to avoid potential problems in the supply chain, using SCEM. SCEM gives the manufacturer the ability to take into account unforeseen events, and to plan accordingly. Using figure 1 as an example, the manufacturer is able to see that Supplier 1 has had problems delivering products in the past. Entering the loop, the manufacturer will attempt to find another suitable supplier, taking into account each supplier's pros and cons.
Finally, once the product is produced, the manufacturer can use the above functionality to deliver the product to the consumer.
An SCM Vendor Overview
In the SCM marketplace, one finds many tier-one vendors that offer solutions in both the SCM and ETO software markets. Vendors such as Oracle, SAP, Lawson, Infor, Epicor, QAD, and IFS provide both ETO and SCM software. Other vendors, such as i2, HighJump, and RedPrairie, focus solely on SCM, yet these vendors can still help in lean manufacturing or ETO manufacturing environments.
Supply chain vendors that offer solutions integrated with manufacturing capabilities.
Oracle's solution is one of the most robust on the market today. Oracle's range of modules indicates that the vendor is primarily focused on the tier-one manufacturing and supply chain markets. To help firms' supply chains, Oracle provides solutions with the following functionality: advanced procurement, logistics, and transportation. Due to the robustness of the vendor's solutions, it also provides advanced supply chain planning, collaborative planning, DM, inventory optimization, global procurement, sourcing, and transportation management within its supply chain suite.
SAP's solution is equally as large as Oracle's. SAP offers very robust warehousing, transportation, procurement, and order fulfillment functionality. Within its solution's warehousing functionality, SAP offers cross-docking, geared toward a distribution flow of goods to move throughout the warehouse.
Lawson's solution is vertically focused compared to SAP's and Oracle's. Starting with ERP, Lawson's solution offers a very broad range of manufacturing technology. However, the vendor has entered the supply chain market with extensive supply chain functionality. Two of its main target vertical markets are the health care and the fashion and apparel industries. Lawson's product has integrated analytics built into the application, with an inventory statistics module and an extensive supply chain planning module.
Infor focuses heavily on the pure play distribution (i.e. wholesale distribution) market. Centering on strategic network design, distribution planning, demand planning, radio frequency identification (RFID), event management, and the typical WMS and TMS, Infor has an integrated system to help wholesale distributors meet the ever-changing challenges of the distribution industry.
Epicor aims its solutions at mid-tier distributing companies. The vendor's supply chain solution uses the WMS as the main focus for moving goods through the supply chain, along with an SRM tool that handles both procurement and sourcing functionality.
QAD has an extensive enterprise solution for the supply chain. Focusing on supply chain planning, electronic data interchange (EDI) e-commerce, supply chain visualization, and TMSs, QAD offers this functionality to enhance visualization (i.e. to know where products are within the supply chain). Also, with the supply chain planning module, supply chain managers can have alternative options if something goes wrong in the supply chain (for example, if a shipment doesn't arrive on time, another supplier can be chosen).
IFS is well suited for idea-to-final production and delivery type of manufacturing environments. Its solution is built with the manufacturer in mind and is suited for complex manufacturing-supply chain environments, as working with many manufacturing suppliers to get the lowest price and the best quality can be a difficult task. IFS also offers project-based functionality, which is very important in ETO manufacturing.
Leaders in pure play supply chain solutions.
Highjump's supply chain solution focuses on lean manufacturing. With functionality such as supplier enablement, delivery management, and transportation and warehouse management, data is taken from the ERP system to enable efficient movement of components and goods through the supply chain. This is done through the vendor's manufacturing execution system (MES).
i2 is strictly focused on SCM. With heavy supply chain planning, i2 can help organizations with such functionality as plan management, factory management, channel management, total merchandise management, total inventory management, total supply management, total logistics management, and an i2 operations services. In addition, i2's software is aimed at global supply chains and is able to help organizations in a global supply chain environment.
Last but not least, RedPrairie is an end-to-end supply chain solution vendor, focusing on the value chain of moving products globally, from manufacturer, all the way to retail and the final consumer. Offering extensive functionality in its TMS and WMS solutions, RedPrairie also focuses on supply chain visibility, enabling users to see where goods are and when those goods are to go, using business intelligence (BI) technology.
The Final Word
SCM software enables ETO manufacturers to maximize cost efficiencies and to import components in an efficient manner. Modules such as SRM and SCEM can help ETO manufacturers and supply chain managers take control of the entire value chain from beginning to end—from sourcing, all the way to the final product.
ETO manufacturing places huge demands on a business's resources (i.e. labor, machinery, and software), but SCM software can help manage the efficiency of the outsourcing process. SCM can give an ETO manufacturer not only a competitive edge over other manufacturers, but it can help to improve its internal business processes and to automate many of its tasks. As well, SCM software can integrate the business in ways that are simply not possible when using disparate software solutions.