ETO vs Project Manufacturing

In the ERP manufacturing space, the term ‘order fulfillment‘ refers to the process that manufacturers follow to make goods for customers. The options are:

Make-to-Stock (MTS) The product is built against a sales forecast and put into stock, from where it is sold to customer; e.g., the retail sector.

Make-to-Order (MTO) The product is based on a standard design, but component production and manufacture of the final product is linked to a customer’s order specifications; e.g., high-end motor vehicles.

Assemble-to-Order (ATO) Similar to MTO but the product is comprised of modular components and is built  to customer specifications from a stock of existing components; e.g., the Dell approach.

Engineer-to-Order (ETO) The product is designed and built to customer specifications; this approach is most common for large construction projects and one-off products

Accepted practice with these processes is that a material requirements plan is put together using the Bill Of Material (BOM – the components, production operations, inventory and lead times) of the product, following which a master production schedule (MPS) is developed from the order, inventory and production information available.

The company I work has, for a number of years, been growing its experience and expertise in the custom-production areas of the order fulfillment process; what some would call ETO. We have been finding that although ETO-type manufacturers never build the same product twice, and may have many unique orders being built simultaneously, they consider it sacrilege to go against the concept of a BOM; even though a BOM is only really applicable and useful if you can re-use it.

I have encountered manufacturers who think that they have to a BOM to make their products. But when you probe deeper you discover that what they make is unique (ie, project-driven) and therefore requires a new BOM everytime.

A few companies, however, are starting to follow a new practice – what we have called for the moment, Project Manufacturing (PM).

As Frank Scavo pointed out in his blog:

“For organizations that are project-based … there is a great need to integrate project management with ERP … the project schedule is (or should be) the master production schedule. Requirements for material, labor, outside services, and other resources are directly tied to the work breakdown structure. ERP systems based on a traditional MRP approach simply do not work. Project-based organizations are relatively under-served by enterprise system vendors.”

These project-oriented manufacturers follow the PM approach – using project management software applications to do their detailed manufacturing planning, rather than an MPS. The labour and material allocations that conventionally are done via the BOM are managed via the work breakdown structure (WBS) of the project plan. Frank’s comment that these types of manufacturers are ‘under-served’ is an under-statement. None of the standard and well-known ERP vendors provide this type of functionality.

We have had the privilege of working with a few leaders in the PM space in South Africa, and help them to develop the integration of project management and ERP. It can be quite a culture shock for someone coming from a standard manufacturing process to adapt to the PM approach, and in my case it took over a year to develop a deeper understanding of the processes and technology involved.

The purpose of this blog article is to introduce the concept of PM, and find perhaps a better acronym. In later blogs I will go into more detail about how PM differs from the other order fulfillment options, how to allocate labour and materials in the WBS and then link it to the ERP system, how it works from a software and process perspective, and what it involves for project implementation. In the meantime, comments would be most welcome.

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3 thoughts on “ETO vs Project Manufacturing

  1. Managing BOM’s for these types of companies gets particularly interesting when the unique jobs require cutting raw materials to make the component pieces. Our customers use two different types of BOM’s. An engineering BOM that details out the individual pieces of material required by the detail drawings and a purchasing BOM that is an aggregation of pieces into sizes that can be purchased. The idea of creating inventory masters for thousands of sub-component parts that will only be used once is intolerable to most companies in these types of industries.

  2. Pingback: Rise of EPM applications « The Manticore blog

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