Tackle the customization problem head-on with engineer-to-order automation

To remain competitive, manufacturers in many industries are forced to offer product customization to exactly fit customer requirements. This flexibility often comes at a price—higher costs, longer lead-times, and greater complexity. At the same time, manufacturers are under pressure to reduce costs, lead-times, and complexity.

A survey from Tech Clarity on product customization trends shows many companies are increasing product customization as a competitive advantage, while others are decreasing the degree of product customization to save money. In my first-hand observation, the companies that embrace product customization and execute it well are often the market leaders.

Fundamentals of product customization

There are two fundamental approaches to product variability management:

• Configure-to-order (CTO) products offer certain pre-determined combinations of features and options. Customers can pick from these combinations the closest match to their requirements.
• Engineer-to-order (ETO) products are individually engineered to each customer’s specification, offering an exact match to their requirements.

Because CTO products have pre-determined configurations, they are pre-engineered and pre-validated. This tempers the negative impact of customization on cost, order lead-times, and process complexity. This also comes at the price of increased initial design and validation. ETO manufacturers bear the full impact at order-time for product customization. The following charts illustrate the typical cost-differences facing manufacturers of ETO products, CTO products, standard (non-customized) products.

Running away from customization: The drawbacks of “ETO2CTO”

Recently, I’ve seen some ETO manufacturers trying to migrate all or parts of their product portfolio to CTO, sometimes under the initiative label of “ETO2CTO”. They are tempted by the allure of lower costs, lead-times, and complexities while still offering a product that can be somewhat tailored to specific customer needs.

With respect to this trend, I’ve seen successes and I’ve seen startling failures. It depends on the specific industry… in certain industries, ETO is necessary—either customized products offered are so complex it’s not possible to pre-engineer all product variants, or customers expect customized products which are engineered to precisely match their exact requirements and/or they demand the highest possible operating efficiency.

If you’re in an ETO industry and attempt ETO2CTO, you may well be placing yourself in deep trouble.

Here is one example from the power systems industry where customers demand customized products that precisely meet their requirements and operating efficiency is imperative. This business dispatched Engineering for two years to develop (design, pre-engineer, and pre-validate) a CTO product to supersede their existing ETO product. I received a phone call from them one day where they explained, “While the new product is good, the market has flat-out rejected it because it can’t be customized enough.” They pleaded with me to help them do ETO more efficiently. They were too late. Within 6 months of that call, they were acquired by a competitor. I’m pretty sure this was not the ending their Executive Team had hoped for when they commenced ETO2CTO.

Because of their industry, instead of investing in CTO, they should have invested in becoming good at ETO… using rules-based ETO automation to drive down the cost, lead-time, and complexity of ETO.

Embracing ETO automation

While there are significant challenges associated with product customization, for many industries, product customization is not only expected, but essential. Those that try to shift to configure-to-order approaches can experience market backlash when customers do not receive the level of customization they require.

Engineer-to-order automation can curtail the challenges of product customization. Here, I’d like to highlight manufacturers that are increasing the degree of product customization to ETO levels to better compete, even though their competitors typically purvey the more restrictive configure-to-order products. CTO products offer only certain pre-engineered combinations of features and options while ETO products are individually engineered at order time to precisely match each customer’s exact specifications.

The manufacturers I’ve seen compete using ETO apply very high degrees of ETO process automation to reduce their process cost, lead time, and complexity down to CTO levels or below. Essentially, they offer highly customizable products with none of the traditional operational challenges. By offering greater customization with no impact on lead time or cost, who wouldn’t purchase from them?

ETO process automation in practice

Here is one example from the commercial HVAC industry—an industry which is notoriously competitive and is largely driven by CTO products. This business made the strategic decision to gain market share by offering an ETO product at the cost and lead-time of their competitors’ CTO products. They applied extreme rules-based ETO automation—computers armed with product engineering knowledge crank out new product designs for incoming orders 24-hours a day and then electronically transfer all necessary data to their shop-floor systems. Most of their ETO orders are 100% engineered by automation… untouched by human hands. Hence their cost/lead-time/complexity goals are met. This strategic initiative not only accomplished its objective of dramatically growing market share, but it helped propel them to the top of the market leader board.

In another example, a large cooling tower manufacturer was acquired, and to control costs and complexity, the new parent ordered a move away from ETO. Disagreeing with that direction, a group of senior leaders from the acquired company left to form their own company. They built it from the ground-up with ETO automation in mind and this young startup already has revenue that rivals that of the original company.

These two stories are not surprising. The chart below from the survey shows reliance on rules-based automation is the best practice with the greatest differentiation by market leaders. Nearly half of market leaders use rules-based automation wherein only one-in-eight is the norm!

The moral of the story…

If you are doing ETO in an industry that does not demand ETO products, pre-engineer CTO products and take advantage of configurators like Siemens’ solution for product variability management. You’ll receive the benefits of lower cost, shorter lead-times, and reduced complexity.

If on the other hand, your industry demands ETO products, or you could use ETO as a competitive advantage, you can drastically reduce your order engineering costs, lead-times, and complexity with the world-class Rulestream engineer-to-order software from Siemens.

About the Author: Rick Smith is a product manager for the Rulestream ETO solution at Siemens PLM Software. He abhors wastefulness and has spent three decades helping manufacturing businesses become more competitive and profitable by stomping out inefficiencies across their enterprises.

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