Manufacturing is difficult. And if you are in an ETO manufacturing (Engineered-to-order) business, the process is even more difficult. You don’t have the luxury of producing the same commoditized products as MTS (Make-to-stock) manufacturers. Due to the heavy engineering involved, your products may not be as simple. Like a repeatable job in the case of MTO (Make-to-order) manufacturers.
As an ETO manufacturer, if you are lucky to be in highly differentiated sub-industries, you might have enough margins. Examples of such industries? Industrial Automation or Machinery. And might not have to worry about process efficiency. However, if you are in a space where the competition may be fierce. Or the margins may be decreasing, you need to find ways to reduce your costs to boost your profits. Especially if your sales have become stagnant or you have capped out the market.
Why is ETO manufacturing so common?
In an industry where you have a heavy emphasis on design such as Engine or Aircraft manufacturing? You may not have much of a choice due to a lack of standardization between the two projects. There are ways to gain efficiencies in those industries as well. But for this article, we are talking about industries where companies overuse ETO practices. We have been trying to reflect on the reasons why that is such a widespread practice. A practice when some of these manufacturers could be CTO (Configure-to-order).
The drivers for ETO manufacturing
One of the reasons could be that ETO manufacturers didn’t have much of the product background, to begin with. They started as a contract manufacturer or engineering shops. And they remained that way. Now they are too big to even remotely think about changing their business model, supply chain, and production processes. The other reason could be that this is how the entire industry operated traditionally. And most other companies simply followed. Yet another reason could be that, historically, there may have been serious technical limitations. Limitations? To support the highly configurable products these businesses needed.
Is consumer demand a factor?
Traditionally consumer demands drove the requirements for product configuration. For example in the case of windows and door manufacturing, furniture, and some equipment manufacturers, they would typically follow configure-to-order. Why? Because sales teams would need configurable options in order to be able to quote.
However, in other industries such as sign manufacturing, fireplaces, or slightly more commoditized spaces, it’s different. How? The product configurations may not be driven by consumer demand. And by default, these businesses would operate as ETO even though they may not be as highly engineered. And could be produced in a modular fashion.
Do ETO organizations consider them as a manufacturing businesses?
When we spoke to a team at a robotic industrial process automation manufacturer in Hamilton, Ontario, Canada, and referred to them as a manufacturing business, they didn’t receive it well. They considered them a bleeding-edge technology shop that managed projects for their clients. In another conversation with a VP of Operations at a sign manufacturer from Toronto, Ontario, they had a similar opinion. And when we offered them a few options about how they could simplify their processes, they could not relate to any product terms. For them, they thought in terms of order and a job. They just could not understand if there could be any commonalities between the two orders. And if that could be used as a drive to transform their business model. Why? Because the business was operating with the mindset of ETO since its inception.
While they had BOMs, they were having a hard time visualizing the modeling of products. They didn’t think of them as a manufacturing business, as they thought their processes were uniquely different. This is a similar challenge they talk about in business school case studies while attempting to convert a service organization into a product-driven. Such process transformation initiatives require a change in mindset. This change is typically one of the hardest problems to solve in an organization.
Despite our initial struggle, when we started thinking in terms of lego blocks, they began to relate. And we found that with some variations we might be able to build repeatable processes. That could be supported with some variants of configurations. This mindset required them to think in terms of modularization as a two-step process. Or multi-step one where they could prepare base modules first and inventory them. And then they could manufacture the rest of the modules. Along with assembling them with the base modules.
The benefits of business model transformation
This change of mindset could bring, as it did for the organizations discussed above, several benefits outlined below:
- Faster time-to-market: Since you are cutting the time for preparation of base from the order, the customer can get their orders faster due to reduced lead time. This could be a huge edge over your competitors. Also, in the case of businesses such as sign manufacturing, faster time-to-market is of paramount importance as time-based triggers drive the demand such as remodeling or rebranding of a facility.
- Highly personalized products: this change also allows you to enable personalization aspects to your products such as walking your customers through a configurable virtual product portal that helps them visualize their selections before they can place the order. In the case of ETO, this would not be possible and you might have limited (otherwise expensive) options for your sales demonstrations, primarily based on case studies or brochures. Product configurators could be a highly effective tool for your sales and marketing teams.
- Fewer Mistakes: Since we have separated the process of making a base from the rest, there will be fewer mistakes as the process of making the base is standardized and repeated.
- Improved Quality: repeated processes help in identifying trends for improvement as well as consistent processes enable better process control. This results in superior products.
- Financially Efficient: the tendency to engineer every order from scratch can create a culture of duplication and inefficiency, which can be eliminated through standardization. Streamlining these processes helps with reduced costs.
- Product Strategy: typically in ETO organizations, it’s very hard to find which projects are profitable and which are not. It’s also hard to extract data to do financial analysis. Repeatable modules allow you to do better planning and analysis of financial data.
ETO manufacturing with CTO
Also, just because you can convert some or all of your products to CTO, it doesn’t mean that you will stop taking ETO orders. Your sales process based on CTO would help your clients visualize and have more confidence in the customizations they might need. This will not only reduce the risk for them, but they will also have more confidence in doing business with you. Finally, as you accept more customizations, you will be able to evolve your configuration options and product strategy.
While the change in mindset is the first step to taking advantage of this transformation, you will need a system that can support the changed processes otherwise it may be harder to enforce. Depending upon the level of configurations required, a suitable modern ERP system that is designed to support hybrid and mixed-mode manufacturing while integrating with your CAD system will allow you to enable such transformation in your organization.
ETO manufacturers can take advantage of several opportunities, especially now that modern ERP allows you to have complex business models and transform business processes, but the first step starts with changing the mindset and taking baby steps as you ramp up for your large transformation efforts.
When you are ready, at least think about different opportunities you may be able to tap into because of advancements in technology. You just need to call an independent ERP consultant such as ElevatIQ to learn the options available to you at any given time.