Q2O Systems: Solutions for Quotation Management and Pricing Configuration

Product configurators have evolved to include more sales, marketing, and financial functions (please see The Essential Components of Quote-to-order Applications. Configurators have become critical to the sell side of business-to-business (B2B) and business-to-consumer (B2C) e-business applications. To serve clients better and ensure that customers are able to purchase complex products over the Web, quote-to-order (Q2O) configurators are playing integral roles.

For more background, please see The Basics of Quote-to-order Systems and The Complexities of Quote-to-order and Possible Solutions.

The Goals: Accurate Quotes and Pricing

As the name suggests, Q2O systems revolve around quotation management—a description of the products and services that a company delivers and that are accurately priced in a way that enables customers to buy. A quote is a statement of price, terms of sale, and description of goods or services offered by a supplier to a prospective buyer. When a quote is given in response to an inquiry, the quote is usually considered an offer to sell. The ability to turn quotes into sales is what distinguishes the industry leaders from their competitors.

Although close rates on quotes range dramatically among industries, all successful quoting systems share common attributes. Namely, only quotes that comply with all pricing and other rules applicable to a particular product or service should be generated by Q2O solutions. Procedures make sure that all quotes accurately reflect the business rules with respect to the quoted product or service. The benefits of accurate quotes include a reduction in the need to inform disappointed customers that the company cannot live up to its promise (quote), and the elimination of the need for quotes to be reviewed, time and again, by internal compliance teams.

Most enterprise resource planning (ERP) systems offer quoting modules that provide both Web-based and desktop form–based user interfaces (UIs), allowing for easy creation, management, and personalization of customer quotes. Once a quote is created, a salesperson can add products (including configurable products) to the quote by searching the product inventory. When a configurable product is selected for addition to a quote, a dynamic hypertext markup language (DHTML) configurator user screen can be seamlessly invoked to provide guidance in matching the needs of the customer with the product options and ensuring more complete and accurate quotes. Upon completion of the configuration session, the configured product is added to the quote. After a quote has been converted to an order, any configurable models can be reconfigured before the order is booked into the ERP order management module.

However, due to some functional gaps, many ERP quoting modules still permit users to enter inaccurate orders into their systems. Because these ERP systems are often linked directly to manufacturing, this can result in products which either cannot or should not be assembled. Accurate quotes enable enterprises to avoid costly order rework by ensuring that only feasible orders are entered into the ERP systems. This also prevents or reduces reworks or write-offs by the sales force to compensate for cancelled or delayed orders.

All of these benefits can significantly enhance profitability and customer satisfaction. Specialized quoting and proposal solutions are thus designed to handle any sales model, whether a sales representative's model, an independent dealer's model, or a reseller's model. Specialized quoting and proposal products have to seamlessly integrate with ERP solutions to provide uninterrupted sales automation and tracking, from lead creation and distribution, to quoting and proposal generation, to order placement and post-order service.

In addition to increasing the accuracy of orders (and thereby saving money in rework and rejected orders), focused quotation management solutions' benefits and opportunities come from improving the quote-to-close ratio and from trimming off the significant amount of time required to develop quotes for manufacturers of complex products. Also, integrating quoting systems with ERP and supply chain management (SCM) systems should result in able-to-promise (ATP) and capable-to-promise (CTP) checks. These checks can be performed during a configuration session to provide an estimate of product availability based on material and resource constraints to assist a user in making buying decisions.

Last but not least, since manufacturers have complex pricing requirements, pricing configuration engines can be used to automate pricing and quoting processes. Price management tools enable the definition of complex pricing rules and allow modeling of pricing scenarios. The pricing engine executes the pricing rules to determine the price dynamically based on the supplied rule factors. These rule factors are all designed to eliminate stock-keeping unit (SKU) proliferation by bundling intelligent pricing rules. Such systems help capture and automate pricing at the point of sale, and allow users to manage sophisticated pricing logic across the enterprise to accelerate the introduction of new pricing schemes.

Advanced pricing can also be enabled to assist in implementing sophisticated pricing strategies beyond base pricing to meet rapidly changing e-business requirements. Dynamically updated list prices are provided for product models, option classes, and options during the configuration session, while selling prices and extended prices can also be provided for all selected items. Pricing systems leverage pricing data in ERP systems to deliver more sophisticated pricing information with customer- and partner-specific rules, discounts, and controlled access to pricing information. This allows companies to extend ERP pricing data throughout an enterprise e-business environment with contract-based pricing, promotional pricing, cost-plus pricing, price breaks, combination pricing, segment-based pricing, coupon management, and other needed capabilities.

At the heart of pricing configuration is a company's ability to manage pricing at three levels: the industry price level, the product and market strategy level, and the transaction level; each of these levels builds upon the other (please see The Case for Pricing Management). To that end, Q2O software suites help companies ensure that all orders conform to specific criteria. For example, if a company had a minimum gross margin requirement for a given product, the pricing solution could ensure that the features and options chosen will result in a product that meets the company's margin objectives.

Pricing configuration systems have to provide best practices to handle the execution and enforcement of pricing through each of the above-mentioned levels to maintain price integrity and margin control. Pricing configuration systems should allow for any level of pricing and presentation flexibility while permitting the enterprise control of and visibility into field quoting practices.

Potential pricing configuration benefits and opportunities originate from

  • reduced unit costs (through more accurate pricing options within base product designs);
  • increased accuracy of pricing, resulting in reduced billing cycle times; and
  • reduced overall quoting errors, leading to more accurate quotes and increased customer satisfaction (and, eventually, an increased quantity of sales orders).

In addition to the previously mentioned distributed order management (DOM)—please see The Essential Components of Quote-to-order Applications—and asset management modules, an optional Q2O suite module is enterprise contract management software. This suite includes the ability to aggregate and analyze enterprise-wide contract information, automate and accelerate contract-related business processes, enforce contract and relationship compliance (according to the US Sarbanes-Oxley Act [SOX]; please see Important Sarbanes-Oxley Act Mandates and What They Mean for Supply Chain Management), and automate the contract process from request to signature. The addition of these capabilities creates Q2O solutions that are then able to manage the contract life cycle, from request, to signature, to execution.

To avoid possible confusion, Q2O systems are also called interactive selling systems (ISSs) by Gartner, and they are defined as the integration of a marketing encyclopedia system, sales configuration system, proposal generation system, and order management system under a common UI. ISSs are used to streamline and enhance the selling process. With an ISS, a salesperson can sit with the customer and pull up data to prove product value, configure a quote, and create a proposal, and then turn the proposal into an order and book it.

In summary, Q2O software bundles enable salespeople to suggest solutions based on a buyer's needs, configure proposed solutions based on a buyer's requests, and provide accurate quotes for complex products and services. These solutions also enable enterprises to extend their business rules to the sales channel by restricting the sales force from presenting quotes that do not fall within enterprise parameters. These enterprise parameters can run the spectrum, from manufacturability of a product to the required margins on any given product or service. Q2O products must allow these business rules to be easily modified, and then provide almost instant dissemination of the updated rules throughout the organization.

Different Q2O Strokes for Different Manufacturing Folks

Although Q2O systems, and especially configurators (as the pivotal modules), seem ideal for complex products and services that include many options and accessories (that are oftentimes mutually exclusive), they are still not universally applicable to all manufacturing environments. As seen in Product Configurators Pave the Way for Mass Customization, early configurators used a programming paradigm, known widely as the production rules, to provide dynamic and runtime decision-making that is essential for obtaining a valid configuration. These tools use a uniform mechanism for representing both domain knowledge and control strategy, and embed the knowledge about a single entity over several rules. This makes the knowledge maintenance task for large rule-based systems extremely difficult.

To overcome the drawbacks associated with rule-based systems, a generic, domain-independent model for configuration tasks was suggested in the form of a constraint satisfaction problem (CSP). The configuration problem is defined by a finite set of variables, with each variable taking only certain values from a domain of finite sets of possible values, guided by constraints that restrict the variable combinations and the variable values allowed in such combinations. The configuration task is designed to find a domain value for each variable in such a way that all the constraints are satisfied.

To illustrate the applicability of rules and constraints, the product configuration strategies within various manufacturing environments need to be looked at. The next step, in terms of complexity, after make-to-stock (MTS)—where product configuration is not needed by default—would be an assemble-to-order (ATO) production environment. An ATO product environment is one where a good or service can be assembled after receiving a customer's order. The key components (bulk, semi-finished, intermediate, subassembled, fabricated, purchased, packed, and so on) used in the assembly or finishing process are planned, and they are usually stocked in anticipation of a customer order. Therefore, receipt of an order initiates assembly of the customized product. This product configuration strategy, which focuses on taking manufactured components or subassemblies and creating a finished product, is useful when a large number of end products can be assembled from common components.

ATO product configuration strategies are often rule-based and define the interrelationships and compatibilities among components, subassemblies, and parts of a product. ATO is thus best suited for volume purchases, where quotes should be automatically generated and a quote engine is an option selector. An example of an ATO strategy is the definition of components in a laptop computer, where the product is assembled from a series of stock components. In other words, the ATO strategy is found most often in high tech and electronics. These industries provide high-volume, low-margin products that require minimal assembly, while new product introduction strategies have to consider rapidly declining pricing.

Furniture, retail (including do-it-yourself [DIY]) stores, packaging, printing, health care, and insurance are other areas where an ATO configuration strategy is used. The early product configurators, which could cater to ATO environments, were internally oriented (within the enterprise's four walls). They were typically an extension of the ERP system, with simple bill of material (BOM) selection rules, and their output was typically a proprietary BOM.

In configure-to-order (CTO) environments, manufacturers of complex products are using this product configuration strategy to customize their products to an exacting set of specifications from their manufacturing customers. CTO products are comprised of both standard and custom components, with the majority being customized to the needs of the customer. Industries relying on CTO require intelligent product constraints within product configurators. Guided selling strategies for these products might not work because it is not that easy to define a data model and an underlying constraint engine. Vertical industries that rely on CTO include telecommunications, heavy industrial equipment, turbine and pump production, elevators and escalators, and complex cabling systems.

Further, make-to-order (MTO) and built-to-order (BTO) are production environments where goods or services can be made after receipt of a customer's order. The final product is usually a combination of standard and custom-designed items to meet the special needs of the customer. Manufacturers that have an MTO strategy customize smaller portions of the larger customized product, with the majority of the products' content being based on MTS or standardized products. When options or accessories are stocked before customer orders arrive, the term ATO is frequently applicable as well.

Examples of MTO strategies include auto manufacturers that offer several options on engines and interiors. High tech, automotive, medical, and financial services are several other verticals where this strategy can be useful. Product interrelationships and model BOMs are created automatically for prospective customers, and guided selling makes the most sense here as a lead generation tool. MTO environments can take advantage of pervasive integration with SCM, customer relationship management (CRM), and ERP systems when best practices have been attained across all departments. These environments might also be suitable for online and indirect channels, although, to get the most from this strategy, extensive product training within the channel is required.

The last, and most complex system (from mass produced, to configured, to one-off products) is engineer-to-order (ETO) environments. Here, products require unique engineering design, significant customization, or newly purchased materials. Each customer order results in a unique set of part numbers, BOMs, and routings (please see ERP Systems and the ETO Manufacturing Market). Thus, where the majority of product components are specifically created to a customer's unique requirements, it is referred to as an ETO strategy.

Complex ETO manufacturers produce products that are of high variation, have complex features and options, and vary in end user configuration. Products manufactured as a result of an ETO strategy are defined with highly specific engineering documents, and often require that the sales configurators delivering quotes from these products have the ability to generate multilevel computer-aided design (CAD) drawings and specifications.

Products that are manufactured using an ETO process include aircraft; aerospace and defense (A&D) products; power generators; heating, ventilation and air-conditioning (HVAC) equipment; specialty-use engines; and manufacturing equipment that is purposely built to support a specific manufacturing process. Sophisticated customer interactions (such as order and 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's engineers and original equipment manufacturer's (OEM's) engineers to be in constant, collaborative communication throughout the design and production cycle of the unit. One of the traditional manual functions in a supplier organization has been the sell side request for quotation (RFQ) management. This function usually revolves around a few key experts that have direct knowledge of the product or who can manually pull together the diverse sources of information into a unified document, including quotes, pricing, detailed product information, data sheets, and CAD drawings. These manufacturers invest a significant amount of money in product design and have lengthy sales and manufacturing business processes. This often requires collaboration between the customers, salespeople, and critical back-office experts, making the integration of CAD applications and product data management (PDM) workflows essential.

Developing a contract proposal requires many levels of checking and rechecking customer process requirements and facility capabilities, as well as preliminary design work and sourcing of specific components or materials. The process typically goes through many revisions 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 into lost business opportunities. Even more than in CTO setups, guided selling strategies for highly customized products are often inappropriate because there is no reliable data model and underlying constraint engine.

Less complex MTO configuration strategies typically use a set of predefined component types while taking into account a set of well-defined restrictions on how the component types can be combined. Interactive guided selling systems that are externally focused, stand-alone, or interfaced to ERP systems can help here. These systems typically have separate engines for engineering BOM (leveraging selection rules) and sales BOM (leveraging constraint rules), with some wizard-based capability to create and maintain rules. The typical output from these systems is quotes, orders, and BOMs, with a data-level integration with other systems.

The ETO configuration, by contrast, extends well beyond the MTO configuration. Here, each component type is also associated with a predefined set of parameters, where each parameter has a predefined set of possible values to choose from in order to satisfy all constraints among those parameters. Certainly, in almost all industrial manufacturing segments, the pressure to reduce lead times has become a constant concern. Depending on product complexity, some parts and subassemblies might be quoted immediately, while others have to be highly specified.

Configurator technology has been helping manufacturers improve their productivity by shortening lead times, eliminating the possibility of order errors, and reducing the need for training costs and expertise of the various design and service personnel. Still, while the needs of ETO organizations are different from other manufacturers, many ETO companies can benefit from the mind shift of “everything is unique” to CTO principles.

However, traditional options, such as constraint and rule-based configurators and interactive and guided selling solutions, provide no effective search solution for solving most complex ETO product configurations. In traditional sales, companies still have to rely on trained salespeople to interact with customers, address customer needs, explain product features, and ultimately complete the sale. In other words, enterprises that strive to provide solutions with high value at a low cost have been constrained by a lack of captured condensed knowledge (intellectual property).

This is part four of the series The Basics of Quote-to-order Systems. In part five, knowledge management vendors and their solutions are discussed in detail.

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