Selecting ERP for Engineer to Order (ETO) Manufacturing
If you work in the engineer to order (ETO) manufacturing environment long enough, you probably have had some negative experiences with enterprise software. The fact is that most enterprise resource planning (ERP) software was not designed for a project-oriented environment like ETO. ERP and its predecessor, materials requirements planning (MRP) were designed for traditional manufacturing.
As much as I appreciate business from companies in this situation, I would much prefer to be involved in software selections and implementations that go well, meet business goals within budget and the established timeline. So how do we attain that goal? Following are five essential points to consider for ETO ERP success.
- Make sure that whatever software you are looking at has functionality for project control and monitoring.
Specifically, you will need the ability to define work breakdownstructures (WBS) and activities, project networking definitions, predecessors andsuccessors. The selected software should accommodate these structures to budgetagainst, to report labor, to report actuals and progress, to progress bill and torecognize revenues appropriately.
- Take a close look at the ERP software functionality from the standpoint of project costing and project budgeting.
Most ERP software does handle actual costing andstandard costing. But project costing is different, and is often not dealt withadequately. In ETO businesses, you need a project costing model where youengineer and roll out designs into production. You need to track the cost ofengineering with a number of other overhead costs into the total project cost.
Standard ERP software that only handles actual costing or standard costingoften doesn’t provide the project buckets to capture those costs. ERP designedfor ETO should allow you to define a budget for your project to record estimatesrelated to engineering and other traditionally indirect processes. As the projectprogresses and you design and build your items, actual costs are captured andcan be compared against the estimates. This budgeting and project costing isessential for ETO manufacturers.
- Pay attention to the segregation aspects of projects.
ERP for ETO should allow forsegregation of inventories and WIP. When manufacturing product in an ETOmodel, you build inventory for a particular engineered-to-order project and likelyneed to acquire materials and to build sub-assemblies specifically for this project.
These need to be stored in your inventories segregated from other projects ornon-project items. Similarly, project-related WIP must be segregated. These arekey elements to look for in ERP software.
- because designs are typically not static, revision control must also be considered during selection.
Good revision control processes help maintain items at up-to-daterevision levels. Can items at old revisions be brought up to spec, or must they bedisposed of, or what is to become of them? ERP, truly optimized for ETO, needssophisticated reporting mechanisms to identify out-of-spec items in WIP or ininventory, with processes to bring them to the current revision. Without adequaterevision control, you run the risk of running orders through manufacturing atthe wrong revision. Without good visibility and corrective processes, quality islikely to reject materials made for wrong revisions.
- consider a full project-based solution.
While ERP may have functionality to supportETO, the gold standard for project-based industry is the project-based solution(PBS). PBS is a development in the ERP field in that it is more oriented towardsmanaging unique projects. ERP is, after all, an evolution of MRP and a productof traditional manufacturing. Among many other things, PBS helps a company
gain visibility into individual item’s costs. For instance, if you are manufacturinga part repeatedly for customers with modifications, options and variations, it canbe challenging to determine the costs of a particular item to a particular customer.It can be difficult to monitor costs and track profits without a project, the gluethat binds these costs. ETO (and assemble to order or make to order) models canbenefit from the PBS’s ability to segregate WIP, inventories and cost of goods.
Selecting the right ERP for an ETO environment requires a structured approach.For this type of business model, project management modules must be native andembedded components within ERP. Integrating ERP labor, inventory and WIP intoa best-of-breed, standalone project management software tool is not encouraged.There are many applications that claim to be project management software for theETO market, but really don’t integrate well throughout the organization.As always with enterprise software projects, a good understanding of the businessneeds is paramount. And then, caveat emptor. Ask good questions. Review vendorfunctionality in your specific business context. And plan for success!