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The Basics of Quote-to-order Systems

Written By: Predrag Jakovljevic
Published On: November 28 2008

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Originally published - November 9, 2007

It is not breaking news or an earth-shattering revelation that the days of mass production of commodity products (called "widgets") are numbered for manufacturers and distributors that want to compete on value, and thus strive for higher profit margins. Certainly, the demand for some catalog-based items that are mass produced (in high-quantity production characterized by specialized equipment and labor) in a make-to-stock (MTS) fashion will never die out completely. However, those manufacturers will be forced to compete on price and on their supply chain effectiveness (particularly on delivery processes), with increasingly thinning margins. And this is where we will begin our discussion on quote-to-order systems (Q2O). But first, we need to understand the effects of global competition and consumer demand, and the affect they have the production cycle.

In an MTS production environment, products can be and usually are finished before a customer order is received (which implies some, if not extensive, forecasting). Customer orders are typically filled from existing stock, and production orders are used to replenish that stock. Increasingly, this strategy is likely to lead to lost sales (or at least lower-value sales) because of unavailable competitive product features and the inability to sell add-ons.

Thus, mass production of identical products, which has been the business model of most industries for decades, is no longer viable for the majority of firms. As customers continue to demand quick delivery of lower-priced and higher-quality products (as order qualifiers), they also increasingly require customized products to match their unique needs (which become order winners). Increasing global competition means more choice for consumers and increasing customer demands. Customers are no longer willing to buy standard products from one source if they can have exactly what they want, when they want it, for a fair price and of acceptable quality from another source. Further, while product offerings are growing, product life cycles are shortening—a "double whammy" (two adverse situations).

Hence, the long-standing trend of having to please choosy and savvier customers and of maintaining profit margins via differentiation (that is, a product's value proposition other than its mere low price, since product quality has also long become a given) has been moving toward mass customization. Mass customization is the creation of a high-volume product with great variety so that a customer may specify the exact model he or she wants out of a large volume of possible end items (manufacturing costs remain low because of the large volume).

Indeed, "mass customization" has become the buzzword of the current decade, and to meet this decade's challenges, manufacturers need to make a change in paradigm. When manufacturers adapt their business models to be compatible with mass customization, customers are able to select, order, and receive custom-configured products tailored to their specific needs. This new paradigm combines mass production's economies of scale with custom manufacturing's flexibility (the best of both worlds), which allows customers to select, order, and receive custom-configured products, often from a multitude of product options. For example, a customer ordering a personal computer (PC) may specify processor speed, memory size, hard disk size and speed, multimedia options, removable storage device characteristics, and many other options for PCs that are assembled on the same production line at a low cost. Furthermore, customers may do so through any one of the following channels: the Web, the phone, or a retail store.

The present market demands that most manufacturers and distributors develop a much deeper (and quicker) understanding of what their customers want, as well as produce and deliver products and services in a faster, more cost-effective manner. Many enterprises see mass customization as imperative to meeting profit, cost, and delivery goals while helping to alleviate competitive pressures. Possible benefits and opportunities of mass customization may come from a manufacturing and distribution enterprise's ability to

  • gather product rationalization attempts to better support mass customization strategies;

  • increase product configuration accuracy to ensure manufacturability;

  • bring the engineering department closer to the customer to eliminate non-value added activities;

  • build products on demand to customer requirements; and

  • integrate the front-office or upstream supply chain and back-office or downstream supply chain activities for more rapid order fulfillment.

Mass Customization and the Internet—a Match Made in Cyber Heaven?

The Internet and e-commerce (electronic selling over the Internet) have provided businesses with a virtually unlimited number of opportunities to expand sales and to increase profits. Mass customization has been bolstered by businesses' ability to access new customers and markets; offer new products and services; expand sales channels; and implement new, nontraditional business models through technological advances. Advances in computing and communications technology have enabled businesses to use the Internet as a technology platform to automate and improve business processes in many ways. In the area broadly referred to as e-commerce, the Internet serves as a platform to enable businesses and other organizations to interact with their customers, replacing the traditional (slower and error-prone) forms of communication, such as faxes, phones, and person-to-person meetings.

At the outset, e-commerce transactions were generally simple purchases of commodity products, such as books, airline or concert tickets, compact discs (CDs), stocks, and toys. Most vendors publish information on a web site, making their products available on a 24-hour basis to their prospective customers and indirect channels. This information is typically "static" (showing little change) with periodic updates, and may consist of marketing information, technical product information, and perhaps secured pricing information. This "first generation" (beginning) of the Web approach is also primarily one-way communication, where the supplier publishes information, but interactive sales transactions are largely not supported.

The growth of e-commerce has been well documented, with highly publicized successes and occasional failures (please see Consumers Shop Everywhere: Understanding Multichannel Sales), which includes stories about such companies as Amazon and eBay. However, most of these high-profile e-commerce web sites actually operate in the business-to-consumer (B2C) market, where the products offered are relatively simple (commodities) and of low transaction value. Potent search engines that access product catalogs and links to credit card payment systems are characteristic of these sites, where transactions can be secured and encrypted as necessary. Yet, there are few, if any, interactive options associated with the selection and ordering of these consumer products. In other words, while the cost- and time-effectiveness of Internet-based selling cannot be disputed, its appropriateness for anything beyond selling simple products was dubious at these early stages.

Since then, the Internet has become a platform for selling an increasingly complex variety of products and services. With the emergence of the Internet platform, companies have more broadly and cost-effectively deployed business applications to customers, partners, and employees, and have deployed the most current applications and information immediately available using a Web browser on even less sophisticated Internet-enabled computing devices, such as cell phones, personal digital assistants (PDAs), or PCs. However, many businesses have encountered obstacles in achieving rapid e-commerce sales growth, realizing only afterward that e-commerce sales are not as simple as merely replicating the traditional mass production business model of "brick-and-mortar" producers and simply putting a static catalog online. To ensure success, businesses must simplify customers' buying experiences, provide increased value, add new products and services, use multiple sales channels more effectively, and, in some cases, implement new business systems and business models.

A number of obstacles must be overcome to achieve consistent e-commerce sales success and to capture the lion's share of prospective market growth. The "holy grail" (main purpose) of e-commerce might become the ability to sell highly complex products (having multiple variations) interactively through the Internet, where information flow needs to be bidirectional, with links to fulfillment systems in the supplier's back-office. Sellers (including their agents, dealers, etc.) and customers alike need to identify and authenticate themselves through log-in procedures, where information is securely transmitted. This secure remote access to proper information is the real requirement for industrial products in the business-to-business (B2B) environment. Whether the products are sold directly or through dealers, resellers, or agents, the many rules associated with specifying and pricing a complex product must be made available through the Internet (please see Differences in Complexity between B2C and B2B E-commerce).

Shortly we will address the question of how this can be done given that conventional catalogs or conventional programming languages cannot easily capture and convey the immense and ever-changing knowledge about complex products and associated processes.

Another emerging trend is the desire to provide customer and user self-service capabilities. To that end, it is important that deployed solutions can address such capabilities without necessitating the purchasing and stitching together of different solutions. Of course, for those manufacturers that also use channel partners, this can be a challenge. A solution needs to prevent disintermediation, making sure the appropriate channel partner is compensated, notified, and so on.

The Numerous Complexity Hurdles

Complexity in the selling process might manifest itself in numerous ways starting with product complexity, where the product has many possible features, factors interacting with one another, and other factors influencing the performance, delivery times, or manufacturability of that item. Many products are inherently complex, not only to install and use, but also to specify and purchase, as customers must evaluate and browse through a broad range of base models, options, and accessories to identify the best solutions to meet their needs. Further, the constant introduction of new technologies, products, and features only makes the sales process more difficult.

Complex products are largely found in the high tech and industrial product sectors. Some examples of complex products include networks, telecommunications, and information technology (IT) equipment; air and liquid movement systems; electrical power systems; motors, compressors, and fans; transportation equipment (including automobiles); and industrial machinery. Such complex products are typically characterized by high finished-goods value, with many possible features and options, and complex rules and constraints governing applicability and interoperability of options. In addition, they feature complex product structures and manufacturing processes, where the selling process is heavily dependent on knowledge or expertise, frequently involving multiple "domain experts," which is especially complicated when these products are being sold through direct and indirect sales channels.

A second type of complexity is "needs" complexity. The product or service itself may be relatively simple, such as an insurance policy or a printer, but the factors that go into evaluating a specific customer's needs, and matching those needs with the optimal product or service, may be complex. A third type of complexity comes from flexible or customized pricing and discount programs, including those based on the features of the product.

In addition to increasing product complexity, constant change has resulted in longer and highly challenging sales cycles, since customers often require more time to research, learn, and evaluate their options before the purchase decision is made. Like a reseller, customers should have a good understanding of their needs and domain knowledge (although sometimes they might only think that they know what they want or what is best for them, only to discover that the product they have purchased is not right for their needs). But, even more so than the reseller, customers are unlikely to have a deep knowledge of a particular vendor's products.

Still, the Internet makes it possible for customers to rapidly assimilate information about products and services that might meet their needs, to match these products and services against their requirements, and to obtain prices—all without ever talking to a salesperson. While the providers of the most complex items have been relatively spared from this Internet-induced pressure, the expectations of buyers are rapidly changing, since customers that are more knowledgeable expect salespeople to be more knowledgeable. Yet, very few companies can afford to involve their valuable product experts in every sales cycle.

This brings us to the conundrum of multiple sales channels, a sharp contrast to the past when manufacturers typically selected one channel over another on the basis of cost or convenience. Successful selling strategies today, on the other hand, generally require the use of multiple channels to reach different customers and offer different products and services. Some customers may prefer to buy from a direct sales force, while others would rather purchase from a channel partner (for example, a wholesaler) or online. As a result, many manufacturers are aggressively expanding their channel mix, and thus broadening and strengthening existing channels and developing new ones.

To that end, salespeople must make special efforts to understand a customer's needs, oftentimes repeatedly consulting with headquarters' marketing and engineering experts prior to identifying and recommending the best solution. Even then, the recommended solution may not exactly satisfy the customer's unique requirements, while additionally the vast complexity of many products is driving sales costs higher. The traditional sales arm—the direct sales force in the field—has become perturbed with the difficulties of selling a broadening range of complex, customized products and services in an increasingly competitive environment with inadequate tools.

Typical frustrations stem from

  • often incomplete or incorrect product, price, and customer information;

  • labor-intensive and time-consuming preparation of proposals and quotes , while customers demand more rapid and more personalized responses, often requiring frequent revisits to finalize a customer's needs and product fit;

  • sales forces spending too much time on "non-selling" activities, such as preparing quotes, chasing corporate resources, and expediting and resolving problems with quotes and orders, including the need to "return to base" to complete customer proposals;

  • heavy dependence on inside sales and other internal groups (the so-called "chasing the expert" phenomenon) to determine missing details for product specifications or quotes (whereby questions such as the following abound: Can we do it? How do we build and deliver it? What should we propose? What will it really cost? When can we deliver it?);

  • key internal resources, like designers and engineers, being diverted from more strategic and high-value activities, such as designing newer and improved products; and

  • high potential for errors and amendments in quotes and orders due to lengthy sales processes and manual order entry, with wrong deliveries, returned products, extended payment times, rework, line stoppages, and so on, as unfortunate results.

Indeed, the sales process has to go from the customer via the marketing department. The customer typically starts with the request for quote (RFQ), gets back the official proposal from the seller, eventually places the purchase order (PO), and receives the product and accompanying documentation (customer data pack). The marketing department captures the requirements and validates the configuration, then generates a proposal, prepares the order entry form to enter the order, and prepares the customer data pack. After this, the manufacturing planners have to plan the order based on the factory load and order necessary components. The engineering department also has its fair share of activities, starting with the preliminary engineering design and generated outline drawing (producing a bill of material [BOM], engineering information sheet, customer data, performance specifications, computer aided design [CAD] drawings, etc.), which is passed to the shop floor for the actual order completion and also back to the customer for necessary review and approval (which can involve many modifications).

Owing to the above lengthy and cumbersome processes, increasingly, the most complex products, pricing, and financing typically result in the salesperson rather conveniently offering and selling familiar, tried-and-true products with no frills, and not necessarily the products best suited for the customer or the most profitable for the supplier. In other words, sales channels struggle to understand the products well enough to sell them fully and effectively, and getting salespeople and channel partners up to speed (informed) on new and existing products is expensive and time-consuming.

This is part one of the series The Basics of Quote-to-order Systems. Part two takes a more in-depth look at direct sales forces and other selling strategies.

 
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