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Engineer-to-Order (ETO): Definition, Process Flow, and Best Practices

Engineer-to-Order (ETO): Definition, Process Flow, and Best Practices

Manufacturing is a complex endeavor under any circumstances.  But in the case of Engineer-to-Order (ETO) products, that complexity is multiplied due to the engineering, costing, and change management that is often required. 

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In the production of ETO products, it is critical to have a robust and flexible ERP system in place to help manage that complexity.

The main reason for this is that engineering requirements often require long, global supply chain efforts on top of manufacturing.  These parts and components can be custom-made, expensive, or highly specialized.  And the bottom line is that human management of a far-reaching, global, and complex production and supply chain to produce ETO goods outpaces the human ability to manually manage.

Studies have shown that as high as 50% of manufactured ETO products are through global sales channels.  As a result, having a strong, cloud-based ERP system is essential in managing the unique and custom aspects of ETO products.  Adding to this environment is the push for mass customization by consumers and purchasers of ETO products, requiring an already difficult process to move faster with a higher degree of customized design.

Engineer-to-Order Workflow

So, what does an ETO workflow look like?  An ETO workflow is different than Make to Stock (MTS).  It has additional steps that require extensive quoting and engineering on both the sales side and the product design side.  It also requires an accurate change management system throughout the production process, and it requires continuous monitoring and assessment of the cost to make sure that real-world production conditions remain within the quoted cost structure.  Here are the basic ETO workflow steps:

  • Sales Engineering – An Engineer-to-Order production order usually begins with a Request for Quote (RFQ).  Here, a customer outlines what the deliverables are and the functionality and requirements of the finished product.  Once the RFQ is received, sales staff work closely with product engineers and established company capabilities to produce a quote that meets customer requirements while allowing the company to meet profit targets.  There is often an extensive number of iterations in this process until the desired product configuration is approved.
  • Process Planning – Unlike Make-to-Stock, Engineer-to-Order manufacturing is often different on a per-product basis.  It may be that a company produces variations of a standard product with customized elements, or, it may require a new production method or line for each specific product.  As a result, process planning must be well-defined, accurate, and flexible to allow the manufacturer to stay within its production capabilities and remain within expected costs.  The process planning will include documentation of the design, sourcing and ordering of parts and components, production schedules including major or minor tooling requirements, and their associated costs.  It will also incorporate a robust and well-documented change management process with defined approval and cost mechanisms for changes along the way.
  • Inventory Management – Because ETO products often require specialized and dedicated components not usable in other products, accurate inventory management is important.  Both to prevent the specialized parts from being used in the wrong application and to keep a specialized production line and production schedule on track, accurate inventory management is critical.
  • Manufacturing – In an MTS system, high volumes of consistent products and production runs allow for more data points that ensure more precise costing and accurate understanding of labor, waste, takt time, and other variables.  With ETO products, the reality that each product is a new iteration or product introduces the possibility of unknown variables.  Accurate and dynamic BOMs, automated production scheduling, and labor and shop floor management are critical in the manufacturing process.  This is especially true when change orders are introduced which may require adjustments to the production line processes in one or more places on the factory floor.

Best Practices for Engineer-to-Order

While Engineer-to-Order production can be difficult, there are certain practices that can be undertaken to make the process manageable.  These practices should be built into the manufacturer’s culture to help make the ETO manufacturing process easier:

  • Establish Deep Channels of Communication – Because ETO manufacturing requires much more customer input compared to MTS or MTO, open, accessible, and documented communication with the customer must be established.  This is true from the RFQ stage all the way through production and shipping.  As the production requirements often involve several iterations and design changes throughout the process, engineers, sales, procurement, purchasing, and manufacturing staff will need to communicate regularly. 
  • Reconcile Engineering and Manufacturing Capability – Because product design is either new or because it is being produced for a specific end-use, product design within an ETO environment can be highly innovative and creative.  It is important that manufacturing and engineering work closely to reconcile engineering needs with production capabilities.  This can be done through checklists and other standardized work that help narrow and define the company’s inherent capabilities. 

This does not limit innovation.  Rather, it will help the manufacturer understand how the product fits into its current production capability and capacity, how to accurately structure its Bill of Materials (BOMs), costing and other critical manufacturing functions, and will help determine what, if any, components need to be produced by sub-contractors.

  • Focus on Accurate Documentation – As a unique product, ETO manufacturing can carry added liability in the form of safety requirements, regulations, and other variables.  Accurate documentation from the beginning to the end of the process is critical.  This includes consistent part numbering, accurate BOMs, precise cost models, and robust and real-time inventory management.
  • Deploy System Automation – All the sales expertise, engineering, and skilled production work count for little if cost, waste, and workflow can’t be managed.  And in today’s global manufacturing environment of far-flung supply chains and subcontractors, it is essential that a factory has Material Requirements Planning (MRP), Enterprise Resource Planning (ERP), or some automated system to manage the production flow.  It is difficult enough to manually manage an MTS or MTO environment without systemization.  But it is next to impossible to do so for ETO manufacturing.

The Case for Cloud-Based ERP

Engineer-to-Order (ETO) products make up a significant amount of both consumer and capital goods produced.  And with consumer tastes becoming more sophisticated, the push is on to make an already difficult process even more so.  Demand for faster rollouts, mass customization, and faster lead time is putting pressure on ETO manufacturers across the board. 

To help manage the unique requirements of ETO, factories should look toward cloud-based, dynamic and flexible ERP systems.  These software systems allow the creation of accurate and dynamic BOMs.  With many systems, these BOMs can be duplicated and then adjusted to save time in creating each one from scratch.

Many of these systems allow direct upload of newly engineered products within API connections or through the upload of CSV, reducing many manual steps and automating an important part of the process.

With accurate BOMs, a factory can use its ERP to develop equally precise cost functionality and tie it to finance departments.  The manufacturing department then has access to current and reliable data that can be used for labor planning, inventory management, and shop floor control to keep costs on track and reduce waste and idle time.

While ETO can be challenging for any manufacturer, a robust cloud-based ERP system will allow all of the above best practices to be operationalized within the factory’s culture to produce ETO goods that deliver the desired profit margins with the least waste.

You may also like: Make-to-Order and Assemble-to-Order Manufacturing Process Flow and Best Practices.

Karl H Lauri
Karl H Lauri

For more than 4 years, Karl has been working at MRPeasy with the main goal of getting useful information out to small manufacturers and distributors. He enjoys working with other industry specialists to add real-life insights into his articles, with a special focus on using the feedback from manufacturers implementing MRP software. Karl has also collaborated with respected publications in the manufacturing field, including IndustryWeek and FoodLogistics.

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