Manufacturing is difficult and if you are an ETO (Engineered-to-order) manufacturer, 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 heavy engineering involved, your products may not be as simple as just 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 such as Industrial Automation or Machinery, you might have enough margins not 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 such a wide-spread practice?
If you are 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 two projects. There are ways to gain efficiencies in those industries as well but for this article, we are talking about industries where ETO may be overused or misused.
We have been trying to reflect on the reasons why ETO is such a wide-spread practice when some of these manufacturers could be CTO (Configure-to-order).
Is it because of their background, culture, or limitations?
One of the reasons could be because 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, and 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 technology limitations to support the highly configurable products these businesses needed.
Is consumer demand a factor?
Traditionally if the configurations were driven by consumer demands, for example in case of windows and door manufacturing, furniture, some equipment manufacturers, they would typically follow configure-to-order as sales teams would need configurable options in order to be able to quote.
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
However, in other industries such as sign manufacturing, fireplaces, or slightly more commoditized spaces, 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 the modular fashion.
Do ETO organizations consider them as a manufacturing business?
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 as bleeding-edge technology shop that managed projects for their clients.
Repeated processes help in identifying trends for improvement as well as consistent processes enable better process control. This results in superior products.
In our other conversation with a VP of Operations at a sign manufacturer from Toronto, Ontario, they had a similar opinion. We were asked to simplify their processes. Our goal was to make them configurable but this was harder as the business was operating with the mindset of ETO since its inception. They could not relate to any product terms.
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 product-driven.
Such process transformation initiatives require a change in the mindset, which is typically one of the hardest problems to solve in an organization.
Photo by Kelly Sikkema on Unsplash
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.
What would be the benefits?
This mindset required them to think in terms of modularization as a two-step process or multi-step where base modules could be prepared first and inventoried and then the rest of the modules could be manufactured along with assembling it with the base modules.
In some cases, while the configurations may not necessarily be driven by consumer demand, the guiding philosophy is still the same.
In the case of ETO, configurable sales demonstrations would not be possible (or they could be expensive) and you might be limited with case studies or brochures, which don’t provide as immersive customer experience.
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 the demand is typically driven by time-based triggers such as remodeling or rebranding of a facility.
- Highly personalized products: this change also allows you to enable personalization aspect 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 the 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.
Can ETO work 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 on your configuration options and product strategy.
Is anything else required other than changing the mindset?
While the change in mindset is the first step to take 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.
There are several options for you such as Infor CloudSuite Industrial (Syteline) or Acumatica that can help you accomplish this goal.
ETO manufacturers can take advantages 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 take the 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 advancement in technologies.
You just need to call a company such as ElevatIQ to learn the options available to you at any given time.