How to Best Understand Engineered to Order

Executive Summary

• Engineer to order or engineering to order has a specific definition.
• Sales orders must be submitted consistent with engineered or configuration order as it relates to replenishment trigger.

Video Introduction to Our Engineer to Order or Engineered to Order or Engineering to Order Definition

Text Introduction (Skip if You Watched the Video)

Engineer to Order or Engineered to Order or Engineering to Order, or sometimes called (ETO), is one of the major manufacturing environments. Engineered to order is an extension to make to order where the company receives specifications from the customer. ETO has a referred relationship between the sales order and the replenishment trigger, and it requires a proxy BOM to be created which substitutes for the production BOM. All of this changes how one performs supply chain planning. You will learn how engineered to order is planned for the supply chain.

The Major Manufacturing Environments

The primary manufacturing environments are the following:

• Assemble to Order
• Make to Order
• Make to Stock
• Engineered to Order

An Engineer to Order or Engineered to Order or Engineering to Order approach is when a company designs and manufactures a product based on particular customer requirements.

The Similarity Between Engineered to Order and Make to Order

In both engineered to order and make to order, all of the procurement and production are performed after a sales order is received with the products in the BOM for Engineering to Order being procured and produced the latest as, at the time of the receipt of the sales order, it is not known precisely what is to be built. However, with Assemble to Order, procurement is performed before the sales order is received; however, production is performed after the sales order is received.

At the heart of the question of which manufacturing environment to use is the tradeoff between not producing items that will not be in demand versus the efficiency of generating items in large quantities.

The Unique Manufacturing Environment of Engineer to Order or Engineered to Order or Engineering to Order

It is confusing as to what precisely engineer to order is on supply planning. If “what is to be produced” is not yet agreed upon, it would seem strange that a sales order would be created at all. There is a type of transaction in ERP systems and CRM systems, called a quotation. The quotation precedes the sales order. A quotation is essentially a request for information – which is usually a price but can be other information as well.

If the sales order has to go through a significant amount of coordination and estimation work, a supply chain system does not need to see the sales order. It can rely on the forecast. The quotation would be the right transaction to use when there is a higher probability that the inquiry will lead to a sales order. Quotations do not flow through to supply planning, as they are not committed demand.

The degree of interaction between companies engineered to order is explained in the following quotation from Arena Solutions.

Typically with the engineered to order approach, production information and specifications are constantly moving between the ETO company and the customer. Because most product data (design specifications, requirement files, engineering changes, etc.) is often tossed back and forth several times between the ETO company and the customer, either party can become confused if the exchange of product information is poorly managed. For example, it might be difficult to answer questions like how much and what inventory should be lined up for production. Because engineere to order products are well-tailored, they are often built from difficult to source parts, expensive parts and highly engineering components. Acquiring the necessary product components can be both a time consuming and costly endeavor causing issues before and during production runs. – Engineering to Order

Submitting Sales Orders that Must Be Engineered/Configured to Order

In some industries, particularly in products with electrical components, it turns out it is quite common for companies to submit sales orders to their suppliers that must be engineered or configured before production can begin. In these situations, a high percentage of these orders do eventually become built. If the sales order has a high likelihood of coming to fruition, it does make sense to enter the demand as a sales order. However, a primary benefit of this is that it would allow the supplier to procure the material in the bill of materials before the production date, providing a faster order cycle time to the customer. In this way, engineering to order can be considered as a make-to-order but with a much higher delay in production and procurement after the sales order is created.

What is Engineered to Order

Engineered to order is a perplexing manufacturing environment for supply chain management for the following reasons:

Reason #1: Changing the Rules of the Transaction Location

In all other manufacturing environments, the sequence is for the bill of materials or recipe to be created by engineering and, when complete, transferred to the ERP system. Until this time, the supply chain systems do not even see the bill of materials or recipes. This is a good thing because, during product development, the bill of material or recipe will constantly be revised. Supply chain systems have enough problems with managing BOMs and recipes without dealing with some intermediate bill of materials and recipes that will never be sold. Engineering to order switches the typical sequence by adding the sales order into the supply chain system before the bill of material or recipe is complete.

Creating a Proxy for the Real Bill of Materials

For the supply chain system to make sense of the sales order, it is necessary to assign a sales bill of material or sales recipe to the sales order. This is a proxy for the real bill of material because the final bill of material is not known when the sales order is accepted. Once the final bill of material is determined, a new sales order can be created and the old sales order deleted. This new sales order is assigned to the final BOM version, and this can be done when the final configured product is ready to be scheduled for procurement and production.

Reason #2: The Missing Replenishment Trigger

Engineer to Order is the only manufacturing environment where neither the forecast nor the sales order initiates production or procurement. Instead, there is a further confirmation step, often quite a bit after the sales order is accepted, that finally starts production and procurement. Supply planning systems (both ERP and specialized external systems) typically use demand (sales orders or forecasts) or the consumption-based approach – such as when the planned or actual inventory level drops below a reorder point to initiate production and procurement. For this reason, the trigger is typically performed manually.

Optimally the interaction on the bill of material or recipe will be managed through a dedicated bill of material or recipe management systems – often referred to as a PLM or product lifecycle system. Unknown to many people with a supply chain rather than a product management background, the ERP system should never be the system of record for the BOM or recipe.

Engineer to Order and Configure to Order

Because the end product tends to be complex, customers engage with the engineer to order company throughout the entire design and manufacturing phases to ensure their specifications are met. From the supply chain perspective, there is little difference between engineer to order and make to order. In both cases, the company should not purchase input items to make the finished good until a sales order is placed. However, the engineering lead time, of course, precedes the order lead time.

Configure to order can be seen as a midway point between make to order and engineer to order. That is under configured order product is configured using a combination of already in stock. All that remains is for the customer to select the options. An excellent example of configuring to order is a computer purchasing web page.

Imagine if a good finished product has options in 10 different categories (color, trim level, etc..). If the ten different categories have an average of 4 options, this will come out to 1,048,576 BOMs – which would not be feasible to keep as individual BOMs in a system. Unless one has worked with configurable products, it can be difficult to relate to environments where there are so many options. For instance, BMW has 2500 possible wiring harnesses; the different wiring harnesses are primarily driven by the specific options that are selected by the variant – with the power required for some combination of components in some variants but not others. More examples of the available combinations of particular parts of a BMW include the following:

• 18 owner’s manual languages
• 500 side-mirror combinations
• 1,300 front-bumper combinations
• 5,000 possible seat combinations
• 9,000 center-console combinations

Configuring can rapidly become quite complicated and requires a configure to order software or variant configuration software.

Conclusion

ETO is one of the smallest areas of manufacturing. However, when a company is Engineer to Order, the approach to supply chain planning must change to match these requirements.