Streamlining ETOs

By Thomas R. CutlerCompanies designing products for customers to their own specifications are part of a unique worldwide club of engineer-to-order (ETO) firms numbering 200,000-plus. Even firms that have been exclusively engaged in repetitive manufacturing are now increasingly finding profitable client demand for customization. Almost 90 percent of these unique one-of-a-kind manufacturers have annual sales of under $50 million and have yet to unify the key parts of the process into an integrated business information system.  The benefits of linking ÔÇ£information islandsÔÇØ are substantial and well known, including reducing operating costs and allowing growth without added staff or resources. Few technology solutions are geared to the ETO process, however, and even fewer are priced for the majority of small to mid-sized firms that need the technology.ÔÇ£Every business needs to improve profits, reduce costs and build better products,ÔÇØ says Dennis Parass, of Burlington, Ontario-based Questica. ÔÇ£We all want to shorten cycle times, manage cash flow, identify profitable products and deliver on time and on budget. But project oriented ETO manufacturers have special areas of concern that are critical to their success.ÔÇØ ETO manufacturing is different because the chaotic business process of the ETO company is a managerÔÇÖs nightmare. Unlike most manufacturing companies producing pre-designed products, the ETO firm is faced with a completely different set of challenges. It designs and builds its products to suit each clientÔÇÖs order, adding significant engineering before production can begin. Coordinating the sales, engineering, purchasing, and production efforts is extremely difficult because of the changes made for the client while the order is in progress.ETOs have a number of common characteristics. Generally they are small to mid-sized companies. Their ability to solve a unique problem for a client with a custom designed solution is the source of their success. Engineering is therefore the ÔÇ£engineÔÇÖ of the company and is a critical part of the production process. Because orders are unique, accurate estimates are a key to profitability, and tracking each projectÔÇÖs costs during the orderÔÇÖs progress is essential. The sequence of estimating, designing, purchasing, design modification, re-purchase, cost and progress monitoring, building, design modification, repurchasing materials, finishing and shipping is the typical flow of the ETO manufacturing order. Multiply that complex process by dozens of orders flowing through the organization and you have a recipe for confusion.ÔÇ£The need to design, purchase, and build at a very fast pace is complicated by the need to deal with constant design changes and the need to parcel out information to manufacturing before the design is complete,ÔÇØ notes Parass. ÔÇ£Finding a way to minimize the disruption and added costs is a constant management effort. The bottlenecks that result affect delivery and escalate costs. Controlling the chaos requires ÔÇ£real timeÔÇØ information, impossible to achieve with a paper system.ÔÇØFrom ETO entrepreneur to ETO professional organizationMost small custom design firms depend on the knowledge of a few key people for their success, and the companyÔÇÖs growth is limited by their capacity. At Handling Specialty, a Niagara region custom manufacturer specializing in lift systems, they reached that point at the $4 million annual sales level.Breaking through the capacity ceiling was the companyÔÇÖs biggest obstacle. It marked the transition from an entrepreneurial to a professional firm, and one of the keys to unlocking the growth barrier was sharing knowledge with more people in the company. Unleashing employeesÔÇÖ potential reduced the dependency on individuals, but also increased the capacity of the firm, its profits, and the value of the business, ie, its ability to use its experience to secure future business. Accessing knowledge that was previously locked away in senior employeesÔÇÖ minds permits new staff to contribute more quickly. ÔÇ£The biggest asset is not the plant or equipment but the information that it can use over and over again,ÔÇØ insists Parass. ÔÇ£ETO firms can pump up the value of their companies by capturing the business process with an integrated information system.ÔÇØPrior to the implementation of Questica SE, Handling Specialty experienced increasing sales yet falling profits. Problems included duplication of effort entering data, excessive material delays caused by design changes and an inability to access past history to improve estimate accuracy. There was no ÔÇ£early warningÔÇØ job costing information nor reliable inventory and work-in-progress (WIP) values to produce accurate monthly statements.In order to overcome these problems, the company decided to streamline the business process. The result of dynamically integrating sales, estimating, engineering, purchasing, production and administration into one seamless system was dramatic. In the five years following the implementation of this technology solution the ETO manufacturer doubled sales, yet accomplished this with 10.3 percent fewer design and shop hours than in the year before implementation, and no increase in inventory. Compared to the previous five-year period, the firm recorded a six-fold increase in profits. More importantly, the paper chaos was eliminated and morale soared.These dramatic gains came as a result of key improvements, including shorter order-to-ship times. elimination of duplications, freed up staff capacity, reduced material costs, and real time management information.Shortening the average design-purchase time (by just one week) impacts the amount that can be saved annually on materials by having more time to purchase. Similarly, if designers are free of paperwork and can concentrate on design, much more business can be handled. If the plant receives all its materials when it needs them, manufacturing costs can be significantly reduced through reduced inventory. If ETO manufacturers can easily find and reuse past history to sell again or estimate similar new jobs, the accuracy of estimates can be dramatically improved and margins upheld. The ability to grow without adding staff or plant space will always have a direct bottom-line impact.Ultimately, it requires only a few of these types of improvements to demonstrate the economies in streamlining an ETO business process. By quantifying a few of the benefits companies like Specialty Handling discovered there are substantial profits to be gained by investing in improved business processes.But although most ETO firms are accustomed to spending upwards of a hundred thousand dollars on production equipment, they are frequently reluctant to make similar investments in software solutions. ÔÇ£An integrated business system is the most important production tool an ETO manufacturer can buy,ÔÇØ says Parass. ÔÇ£A system not only streamlines the business process but also archives all product information, drawings, bill of materials and job costs. It will increase an ETO companyÔÇÖs performance by allowing less experienced staff to access historical information and use it to secure new business.ÔÇØAvoiding pitfallsChoosing a system that is designed specifically for an ETO business is essential, but it is also wise to avoid the quest for perfection. The 90 percent solution may be far more practical than a system with an excess of ÔÇ£featuresÔÇØ. Focus on a system that eliminates the real bottlenecks to productivity. In an ETO firm these are usually design and purchasing, where defining the BOM and obtaining the materials present the biggest headaches. Find a cost-effective solution so everyone can be on the system, rather than a few copies just for the ÔÇ£importantÔÇØ users. Think of the vendor as a consultant on retainer. Choose one based on its demonstrated ability to understand ETO needs.Engineer-to-order manufacturers have been overlooked by many business systems software providers. Until recently, small ETO firms have had few cost-effective technology solutions from which to choose, but fortunately the situation is finally changing. ETO software exists and deserves attention. ┬á