For the last 15 years I have mainly worked with project-focused companies producing large products, engineered to order. It has been in industries ranging from marine applications, packaging lines, process equipment to residential buildings. By utilizing Modularization, we have transformed these products from being engineered order by order, to more stable modular product families that can be configured to order. Order engineering has been reduced, sometimes vastly so, and the supply chain has been transformed based on increased repetition and industrialization.
In this post I’m hoping to share some learnings, insights, and best practices about shifting from Engineer-to-Order to Configure-to-Order.
Order engineering is sometimes described as tailoring, comparing to a tailor customizing a garment to the customer's exact measurements and preferences.
Order engineering is a process within an order fulfilment process where products are engineered after receiving a customer order. Typically, the requirements are not known until the order is placed, and because of that the engineering work could not be prepared earlier. The product is also customized to a degree where it is hard to re-use any previous orders’ designs.
Order engineering needs to happen between order receival and start of manufacturing. However, there may be a need to do engineering work already in the sales phase.
Order engineering typically involves different types of engineering within multiple parts of the organization.
Already in the sales process of a customized product there will be needs to make estimations of both the workload for customization and the cost of the product to be able to offer the product at an attractive price while controlling the the risk of low profit margins. There may also be a need to prepare indicative designs to explain the suggested solution to the customer.
Once the order has been received systems engineering needs to accurately set the requirements on the different subsystems and validate the system performance, before engineering work can begin within mechanical, electrical, and software engineering.
The production process must be flexible for the engineering done, and production engineering may have to make specific designs to production equipment or processes to enable production of the customized product. Industrialization and sourcing may also need to be involved to prepare the designs for production and find suitable suppliers.
EtO, DtO and CtO: Three Different Paradigms to Create a Customized Product
EtO, Engineer-to-Order, means that the specification coming from the sales process contains unforeseen values, or combinations with some technical risk, that will need engineering.
DtO, Design-to-Order, means that that the specification coming from the sales process only contains foreseen or planned values or combinations, but that all the parts are not designed or industrialized yet. There is remaining work to complete the design, but only for already planned content with low technical risk.
CtO, Configure-to-Order, means that that the specification coming from the sales process only contains foreseen or planned values or combinations and all the corresponding parts are already designed and industrialized. Sometimes manufacturing or assembly drawings need to be completed, but when it is only a matter of using an existing parametric model, we still consider it CtO.
Order-by-order tailoring and the resulting need for order engineering is something few industrial companies do voluntarily. It is obviously more efficient to repeat already designed and validated parts and products. The need to tailor and engineer each individual order is often required by external factors, but not only. Tailoring and order engineering can also be self-imposed for different reasons. Here are some typical examples of external and internal reasons for order engineering:
Common external reasons:
Common internal reasons:
The bigger and more valuable each delivery is and the lower the annual volume of deliveries, the stronger the reasons for tailoring are growing, both the external and the internal ones.
Split deliveries with varying split and scope means that each delivery is split between multiple suppliers and both the borders of this split, and the combination of suppliers change for each order. It may be practically impossible to have prepared solutions and designs for all thinkable combinations.
Varying Split and Scope in Order Engineering – The need for customization arises when each order requires a different division of scope between suppliers. This variability makes it impractical to predefine all solutions, driving the necessity for order-specific engineering.
Many products need to be adjusted to fit into their surroundings. It can be geometrical adaptations to fit into the available space, but also functional adaptations to fit into a larger system with other machines or equipment and an over-all master control system.
Adaptation to Surroundings – Each order is tailored to fit into different surroundings, whether it's space constraints, structural integration, or system compatibility. This need for customization ensures the solution works seamlessly in its specific context.
Companies that need order engineering to satisfy their customers are often faced with customers with vast experience of integrating the products into a larger system and operating that system over a long period of time. They have experienced many different suppliers with both good and bad results. These customers tend to not only specify performance and functionality but also request specific solutions and design parameters.
Customer-Specific Requirements – While a standard solution works for some, others require custom modifications, such as specific motor types or suppliers. These unique demands drive additional engineering and complexity in order fulfillment.
Harmonization with existing machinery or fleet is related to being a technically knowledgeable buyer, but this customization driver comes from the service and maintenance of the product rather than the operation of it. Since most customers already have their own installed base, they want to secure synergies in competence and spare parts supply to share the same maintenance personnel across all their equipment and reduce their spare part stock. At a very minimum they need to secure robust access to competence and reliability and fast availability of critical spare parts. This drives requests for e.g. control systems and individual parts to be of the same brand and type as they already have in their installed base, even if the installed base is supplied by competitors.
Local regulations and norms are not an issue for all products and all deliveries, but with a global market it can be difficult to have prepared solutions and designs for all thinkable markets. Some customers can even have their own standards and norms on top of the local legislation.
Incomplete product development means that all detailed designs are not completed during product development. Tailoring and order engineering companies typically focus conceptual product development for only one or a few product variants. All other variants and combinations and most of the detailed development, such as preparing manufacturing drawings, are made for the specific order in the order engineering phase of the delivery process.
There are two reasons for this:
New inventions and unplanned design improvements in the sales process are allowed since “we are customizing anyway”. Technically knowledgeable customers are also part of the equation since invention and improvement ideas also come from progressive customers. A strong, technically knowledgeable sales organization in combination with long product development lead times and weak product management shifts the product planning focus from structured roadmaps to ad-hoc sales cases. “If we don’t develop this now, for this customer, we will never do it!”
Since the designs are not ready beforehand and rarely optimized from material or manufacturing point of view, there is a strong tendency to try to reduce cost in the individual delivery project. Since it is a narrow optimization for one specific delivery, it often leads to sub-optimization. Worst case, the design-to-cost savings is only realized in one single delivery and doesn’t even pay for the design-to-cost engineering time. In most cases, the one-off or “limited series” saving doesn’t pay for the total cost of the new parts through the complete value chain: engineering, documentation, purchasing, production, logistics and aftermarket operations.
A final internal reason for tailoring and additional order engineering is risk reduction. When the engineering organization gets their hands on the delivery specification, with a lot of tailoring and order engineering, they often do an additional round of internally driven changes to reduce the risk of the delivery. It can be both to mitigate technical risks, but also to mitigate supply chain risks.
The consequences of order enginereing are increasing downstream from sales.
Most companies that do tailoring and order engineering have a good enough understanding and predictability of the actual order engineering time and cost. The engineering time for each delivery is typically recorded as direct time, making it relatively easy to analyze. But the order engineering time and cost is only the tip of the iceberg. There is often much bigger consequences and cost in the later operations and aftermarket processes that are not recorded and not as easy to analyze, some examples:
Learning Curve – Without repetition the learning curve will restart with each customer order.
Data-driven insights reveal how shifting from Engineer-to-Order (EtO) to Configure-to-Order (CtO) can drive efficiency, reduce costs, and improve profitability.
A part that is frequently repeated should drop 15-25% in cost within the first year. The additional 15-25% in cost for new parts is sometimes referred to as prototype cost and is a function of both uncertainties, non-optimized designs, and the position at the beginning of the “learning curve”.
A part that can be bought in larger batches to stock instead of piece-by-piece to order should be 15-35% cheaper. This is a function of indirect costs and batch related costs (set-up, transport, etc.) being distributed over a single piece instead of multiple pieces. Also, the internal costs for planning, purchasing, transportation and reception will be reduced with larger order quantities. Lead-time, non-conformity risks and the consequential risk of material shortage are also eliminated when procuring outside the critical lead-time.
A big portion of the indirect cost for planning, sourcing and procurement, production set-up, and material management is related to new or changed parts. In order engineering companies it typically reaches above 50% of indirect costs. This could be halved by avoiding order engineering rendering a 25-35% indirect cost saving (or freeing up of indirect resources).
I have encountered four distinct approaches used by industrial businesses to reduce order engineering for customized products, to enhance quality, lead-time, and efficiency:
A challenge when designing a configurable product platform for a large product is what level to work on. The differing perspectives of various company functions, such as Sales, Product Management, Sourcing, and Engineering, raises a question on what level to define modules for large configurable product platforms. For a company making production lines, should the modules be the different sections of the line, or subfunctions within those sections? Or even lower level assemblies to ensure commonality and isolation of changing components?
In my opinion a business needs to work with modularization on all levels of the product structure to achieve flexibility, reuse, and efficiency across all company functions. This poses requirements on how to document the full system to ensure consistency across the different functions.
The modular platform needs more than a logical representation to be managed over time through a multitude of disciplines. These disciplines depends on the nature of the product, but an example of configurable models that might be needed:
The purpose with these configurable models is three-fold:
Figure 3 When a large share of the costs are unknown, pricing is complex and risky. To be able to set the price we need to understand the value of the product, and verify that this price covers both known and unknown costs, in addition to the required minimum margin.
Since customization and order engineering is done after the order is received, there is uncertainty to be considered when pricing.
As a basis we want the price to correspond to the value that the customer gets from the product. If we add value to the product, we should be able to increase the price. However, the actual value is hard to measure and largely unknown. Many times there is also competition for the order, the final price will for most complex customized products be a matter of negotiation.
When negotiating for the price the seller wants to achieve at least a minimum margin. Just as mentioned before the added costs along the value chain for customization and tailoring typically increase and are harder to estimate the further downstream from sales they appear. Many companies fail to take these factors into account when pricing a customized product. The effect is that the real margin of the customized products is much lower than what is expected.
Let's say that the customer requests a specific brand of a fan motor. How can we put a price on this customization? Negotiation could give us a hint of the value of the customization. If we consider that we can add 100 USD to the price of our product for this customization, we need to make sure that this leaves room for not only the margin required, but also the unknown costs of customization throughout the value chain.
Depending on the reason for customization and order engineering, the approaches to reducing it may vary. In most cases, creating configurable modular product platforms is a prerequisite for making improvements beyond simply copying past orders. However, other strategies may also help, such as better preparation for designing customized solutions or guiding customers toward selecting a standard.
By implementing decision support tools and governance models that take bottom-line profitability into account, you may become better at understanding which projects that are profitable and turn down others where the effort and risk will outweigh the price that customer is willing to pay.
In this blog post I have shared some of my learnings from supporting customers that want to reduce the effort needed to customize their products. Reducing order engineering is mostly about enhancing the internal efficiency of the business. While doing so, it is of critical importance to also keep external efficiency at the top of your mind. If you fail to do so, you risk changing your offer in a way that the customers don’t appreciate. Most companies create customizations for good reasons, the trick here is to understand how we can maintain or even improve the value delivered to the customer while still enabling improved efficiency in our internal processes.
I hope you enjoyed reading, if you want to discuss this topic please reach out!
Over the past decades, we have focused 100% on helping businesses worldwide improve their product configuration and configurability.
We are always interested to hear your story and discuss how you can improve from where you are, let us be your sounding board and reach out to me today.
Principal, Manager & Partner
+46 8 456 35 00
alex.ginsburg@modularmanagement.com
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