In this interview with IIE, manufacturing journalist Thomas Cutler addresses scheduling one-of-a-kind products and projects in engineer-to-order environments.
IIE: What major challenges do ETO manufacturers face in developing production schedules?
Cutler: The biggest challenge is that the end user customer is constantly making changes to the actual product. For example, a custom-build elevator manufacturer: A client says, “We are working on a new building; we’re not going to use a stock elevator. We need you to design it for us.” So the architects come in and they have a basic idea, but then the client says, “No, we really need to make changes. We want something more like this.” …The engineering changes that always occur in the ETO space present ongoing scheduling issues. And if they are off a day, a week [or] a month, all the margin goes out the door. The only way in an ETO environment they can try to estimate costs and production schedules is based on previous jobs; however, since each client and each project is different, those scheduling changes must occur because the client is making changes.
Engineering also makes changes. It just creates a constant challenge: How do we keep the original price we bid on a project? For example, this might be a $5 million to $10 million product, but when they bid it, it was supposed to be configured and look a particular way. Well, it’s going to go through 20 or 30 iterations and every one of those iterations now changes the production schedule. It changes the engineering schedule, and all of that eats into cost, variances and differential. …If we are a little bit behind because of this change and we’ve lost margin because of this, how do [we] correct for that with a scheduling method or mechanism?
IIE: Are there ways to correct for those kinds of slippages?Cutler: Yes, there are. Increasingly, there are two major avenues from a technology point of view. There are several companies that have focused on the ETO ERP (enterprise resource planning) arena. How can you make the determination that an ERP program is focused on ETO? The one distinction in an ETOERP system is [whether] they post to inventory. If they post to inventory, they are not ETO. That’s a very simply way to make that clean line distinction. ERP packages that take in raw materials and post those raw materials to inventory until they are used to assemble a finished good – that’s not ETO.
IIE: Is that a good way for people to eliminate/qualify an ETO ERP product?
Cutler: It’s one guideline, absolutely. I think that one of the big challenges is that most ETO manufacturers do not know they are ETO manufacturers. If you ask a mold maker who is doing custom molds or a custom farm equipment manufacturer doing a one-off machine, they say “I’m a mold maker,” [or] “I’m an equipment manufacturer.” Most manufacturers identify by the industry sector they serve, not by the process by which they build projects. Sadly, they often purchase technology that is based on the industry sector and not on the process. ETO manufacturers must look at solutions based on their process – the way they bid jobs, the way they schedule jobs.
For example, the way ETO manufacturers get paid is by incremental benchmarks being met. Let’s say there are 10 payment metrics … when [they] hit certain aspects of building the product. If they are off a month, they just lost profit. So it becomes very important that the ETO manufacturers stop identifying by their product and start identifying by their process. Therefore if they are custom, unique … manufacturers of any product, they are ETO. …Your process is most impacted by how you bid and how you schedule.
IIE: What is the impact of third-party supplier schedules on ETO schedules? Cutler: Part of the challenge with third-party suppliers in ETO is that if the end user client decides to change something… For example, a company builds custom reception desks at hotels. For one client, they are all initially specified to be done in teak. So you do all your bidding [and] identify your vendors based on the reception desk being teak. Then the client says, “No, we’re going with an oak motif instead.” Now your third-party supplier is a different supplier, and the cost can vary. A lot of ETO projects run a year or two to final product. Sometimes third-party suppliers that you bid initially and budgeted are no longer in business. They’ve been bought out, pricing structure changes, and if they are a commoditized organization, price of the commodity can fluctuate. [This] can have an enormous variance and can affect scheduling as well. Maybe the original vendor or the replacement vendor now has a different delivery schedule. If they are off four or five days, your production schedule can be off 10 to 20 days.
IIE: Is there any way to build flexibility into the bid to accommodate these kinds of changes?Cutler: Not much. They go to these manufacturers to bid out the job, and to win the job they bid low. …If you bid it with enough variance in the margins, you may not get the job. If you bid it with the margin and don’t get the job, it doesn’t matter. So you need to bid it in a way that you are going to win the bid but you have to have the variance. You can have the caveat more with the third-party supplier, but you really can’t when you are bidding the job with the end user customer.
IIE: Any words of wisdom on how to manage a situation where a raw material that you include in the bid is in short supply, more expensive by the time you get to the point in the process where you need it?
Cutler: There need to be caveats that protect the manufacturer. This is a process issue. Almost all ETO companies will pull up the last similar job they did. Pull up bid sheets, schedules, and they look at the variables on those jobs – what were the variances with the suppliers they used in that job – using precedent in what they bid. Sometimes that is wise; sometimes it’s not.
IIE: Are there specific steps ETO manufacturers can take to minimize schedule slippage?Cutler: Teach people how to treat you. Set up parameters and boundaries on which changes will and will not be permitted. Too often the end user client will try to get away with all the whims and all the changes that come into their minds without realizing that there’s a true cost. Clearly identify the time frame within which ETO manufacturer will accept changes; changes will be made in these intervals. That’s really part of the negotiation – not just to bid it to win the job but to bid it in a way that ensures a reasonable process. And especially in the last couple of years, a lot of ETO companies are bidding too thin on their margins, and, honestly, why take a job if at the end of the day you’re going to lose money? It’s not worth winning the bid if you’re going to lose money because the client is going to make changes too often or too late in the project. …The time to have the discussion about the impact of changes on schedule slippage is up front at the beginning of a project. There will be slippage. There will be margin loss. There’s a fine line. [You] can’t be a jerk about it, and real engineering changes will need to be made, but you have to have some boundaries.
IIE: Can establishing partnerships with suppliers work to mitigate margin impact of schedule slippage for ETO as it can in other kinds of environments?
Cutler: It can make a tremendous difference, particularly as the supply chain changes. Again, though, it depends a great deal on the customer. He may specify a supplier to use or not to use. That happens. The ETO manufacturer needs to establish a balance between the demands of the end user client within the ETO. Nearly every client believes his project is unique and they don’t want to pay a nickel more than they have to.
Thomas R. Cutler is president & CEO of Florida-based TR Cutler Inc. He is the founder of the Manufacturing Media Consortium and the author of more than 300 manufacturing sector-related articles annually. Read his article, Special orders, in the May 2009 issue of IE Magazine.