This article discusses that the business of engineering has challenges of its own. Engineer-to-order (ETO) differs from make-to-stock or make-to-order businesses primarily in the amount of designing that takes place after a firm receives an order. For either of the two make-to systems, post-order engineering is insignificant. ETO firms depend heavily on engineers and designers inside the order cycle because the machine has to be imagined, then designed and detailed, before it can be built. Handling specialty is a typical ETO manufacturer. It builds lifting and turning equipment used by everyone from automakers in Toronto to stage builders in Las Vegas. Although it makes equipment mostly of a particular kind, no two orders are exactly alike. In order to make a transition from entrepreneurial, family-owned firms to professional ones, ETO companies need to make business information available to employees throughout their organizations.
A veteran of three earlier software implementations, David Beitz raised his hand when company principals said the time to purchase new business software had come. Beitz volunteered—he volunteered—to head up the show.
Vindication for Beitz came some time later when Chuck Stewart, executive vice president of Encompix, showed up for a meeting at Krauss-Maffei Process Technology Inc. in Florence, Ky., where Beitz works. That day, Beitz, who manages the company’s aftermarket service, and his colleagues found in Stewart a man who understood their business.
Krauss-Maffei designs and builds centrifuges and mixers used mainly by chemical pharmaceutical manufacturers. Beitz described the business as low-volume, highdollar, custom equipment manufacturing. Just about every machine the company ships has been engineered to order. Stewart showed them specialty software built to help manage the engineer-to-order business model.
You may not have heard the term before, but your firm may be an engineer-to-order concern itself. Perhaps your business is one of thousands of small and midsize manufacturers in North America that design and build custom equipment. Maybe you make the product that makes the products.
Your company may have grown up and succeeded through the efforts of several key individuals. It may have reached a plateau of sales and growth because those key people can do only so much.
It was that very problem—stunted growth—that led another engineer-to-order company, Handling Specialty in Burlington, Ontario, to develop a business system for its particular needs. The firm’s president, Dennis Parass, now serves as a board member for Questica, the company that formed in 1998 to commercialize the business system. It competes with Encompix.
Parass said engineer-to-order differs from make-to-stock or make-to-order businesses primarily in the amount of designing that takes place after a firm receives an order. For either of the two make-to systems, post-order engineering is insignificant. If you build toasters, your engineering has been finished before the first order ships from inventory, he explained. Likewise, if you are cutting parts to a customer’s drawing, the engineering is finished long before you’re holding the purchase order.
But ETO firms depend heavily on engineers and designers inside the order cycle because the machine has to be imagined, then designed and detailed, before it can be built.
Handling Specialty is a typical ETO manufacturer. It builds lifting and turning equipment used by everyone from automakers in Toronto to stage builders in Las Vegas. Although it makes equipment mostly of a particular kind, no two orders are exactly alike.
When an order comes in, engineering immediately starts defining the design and bill of materials. Long lead items need to be ordered, sometimes even before the design is complete. Often, engineers are reluctant to release partial designs to manufacturing or vendor items to purchasing when quantities can still change. Time considerations usually prohibit a complete release at one time, much as engineering prefers doing just that. Instead, releases have to stream out of the department over the course of several days or weeks.
What makes engineers hesitant to release are the inevitable changes that come back from manufacturing and the customer. The engineering department becomes a roadblock.
The longer a project languishes in design, the less time for the purchasing department to negotiate prices. “By moving information from engineering to purchasing sooner, it’s not hard to knock 5 percent off purchase costs,” Parass said. And with materials accounting for 35 to 50 percent of the sell price in some ETO operations, the link between engineering and purchasing is a pretty good place to start looking for efficiencies.
The typical ETO doesn’t need strong shop floor management, he said. “The shop floor doesn’t build to heavy volumes,” Parass added.
Questica provides a software tool that focuses on getting information from engineering to purchasing as early as possible.
Making a Difference
According to Stewart at Encompix, based in Cincinnati, anything that moves ultimately begins as a quantity of one—the domain of the ETO manufacturer.
“Our customers build complex products with long lead times—not widgets,” he said. Customers like equipment maker Krauss-Maffei.
When Stewart stood up in front of the room at Krauss-Maffei that day, it wasn’t very long before heads began nodding in agreement, David Beitz said. What the people there were finally hearing, after so many similar meetings with other business software vendors, was about a program specifically written to handle their unusual, though not unique, business needs.
Take quoting, for instance. According to Stewart, the average enterprise resource planning software asks what parts are needed very early in the sales cycle in order to produce an estimate. It wants to get down to specifics, to begin building bills of materials and routings, right away. That’s anathema to the custom manufacturer who needs to put just enough engineering in for deciding the how-to’s and how-much’s and how-long’s of tackling a job. Detail work waits for later, when, and if, the order comes. The quoting stage is the time for sizing up old Mr. Risk V Reward.
Encompix reflects a traditional ETO approach of estimating by “buckets,” Stewart explained. There might be one bucket of estimated money needed for material, another for hydraulics, and a third for shop time. Another bucket might hold the cost associated with fabrication. And so on.
Totaling up the buckets for a sanity check gives a number from which a sell price can be determined. It also puts a record in the system that will provide managers a way of tracking a project’s cost against an original estimate—key to any successful engineer-to-order operation. The system can compare a project’s estimate to planned, actual, and completed costs.
Although every project is unique for an ETO manufacturer, nothing is ever completely new. As Beitz put it: “Every project is its own entity, with a unique BOM.”
The quotation and engineering departments have long memories of prior orders, lost and won. History plays a role in pricing projects winningly and profitably. En-compix software provides many ways of searching the history in order to make full use of this resource.
According to Parass of Questica, the ability to estimate accurately is a critical mark of successful ETOs. In some firms, an owner makes all estimates. In others, elaborate structures involve using spreadsheets and similar tools to break out estimates by engineering and manufacturing labor and materials costs. Regardless of the method used for pricing, what counts for most firms is an ability to collect quotation history and to call it up as new RFQs come in. Also important is an ability to compare actual and estimated costs, Parass said.
Meet the Kings
As the name implies, an engineer-to-order company can only be as good as the engineering department serving it. The ETO business relies heavily on this department, where every individual is a repository for the company’s specialized knowledge. “Treat them like kings,” Dennis Parass advises when dealing with designers. Don’t frustrate them into quitting with an endless array of clerical tasks. “Let them do what they’re good at,” he adds.
That’s designing, of course. And it’s here that the bill of materials comes properly into play—not up front during the sales process. Here, the document is an important and necessary step in the order cycle. That doesn’t make its creation any less of a chore.
Thus, engineer-to-order software makes creating the bill of materials a one-time job. By linking the BOM to the CAD system, the document is created directly off the drawing. Materials to be purchased are identified automatically, too.
Scheduling Around the Roadblocks
Engineering is where the imponderables are pondered and where the engineer-to-order customer and manufacturer work things through. It also takes time and can be a roadblock to efficiencies down the line. There are tools available to help the free flow of costing information. Waterloo Manufacturing Software of Wellesley, Mass., takes a different tack and puts the stress on production scheduling.
“Engineering eats up lead time,” said Charles Murgiano, president of Waterloo Manufacturing. "After engineering has taken its time, there’s often none left for anyone else,” he said. ETO customers often weigh their buying decisions on lead times because getting production equipment into place is key to launching a consumer product. But where Questica software helps an ETO manufacturer free up time for aggressive purchasing, Waterloo’s software finds ways for production to schedule capacity in order to meet critical lead times. Waterloo calls it finite planning capacity and scheduling software.
Waterloo’s Tactic software helps to evaluate how the promise of an accelerated delivery for new business will affect other projects already in house. It helps in determining how customer change orders stretch out delivery. When troubles afflict the shop, it evaluates the drag on performance.
The software is designed to enhance an existing business system without the disruption of day-to-day production that full system replacement brings.
According to Murgiano, Tactic software lets schedulers look ahead to spot potential problems and answer what-if questions before they can compromise promised deliveries.
For long lead items, the system allows orders in advance of finished engineering. A tank manufacturer, for instance, might be looking at a two-month lead'time for stainless steel. He knows he’ll need about 25,000 pounds of the material for a specific project. The system will let him order that up front, then later, after the engineering has finished, reorder a more accurate amount, say, 24,800 pounds. A traditional ERP system would make the second quantity a new purchasing requirement, Stewart said. Engineer-to-order software instead recognizes it as a change and reconciles the amount with the original order.
Once the BOM is done, a “good, hard link” connects engineering, purchasing—even the manual—with the rest of the organization, Beitz said. When a customer calls in to order a spare part, Beitz knows they’re both viewing the same page. Any loss of continuity or traceability due to double or multiple data entries disappears.
Buying In at the Top
Many of the ETO firms Questica calls on fall in at around 100 or fewer employees, with sales from $3 million to $30 million a year, Parass said. Their roots can be traced to a single founder or to a few individuals. Many times their natural inclination is to focus on solving technical issues, not business concerns. With the exception of CAD and related analysis software, they’ve generally not spent much on business systems programs. “Spending $30,000 or $100,000 on one [program] is a big decision for them,” Parass said. Many would be more comfortable buying a new milling machine than a couple of disks of software.
Yet, these owner/operators have a feel for the right size of their firms. “They don’t necessarily need more appliance space,” Parass said. “They need to generate more volume from the same overhead.”
He cited Material Specialty’s growth as an example. From 1994, when the company began using Questica, to 1999, it doubled shipments and increased net profits by 600 percent as it reduced shop and design hours by 10 percent. Inventory and plant size remained constant.
To squeeze that kind of efficiency from their operations, ETO managers need reports. They have to compare a project’s original estimate to the time and money being spent on it.
ETO software links sales, design, production, finance, and administration, eliminating, as Questica puts it, “information islands.”
The software helps managers keep track of committed costs—money earmarked for items already ordered but not yet received.
ETO firms may represent a stronghold for North American engineering talent. According to Parass, with the opening of markets to free trade, the percentage of manufacturing contributing to the gross domestic product declined. What was really happening was that the make-to-stock businesses were moving production overseas, while build-to-order and engineer-to-order businesses continued to produce domestically, Parass said.
In order to transition from entrepreneurial, family-owned firms to professional ones, engineer-to-order companies need to make business information available to employees throughout their organizations. This allows all employees to stretch to their potential, while ensuring that a firm’s survival does not hinge on the survival of a few key employees.