ETO (Engineer-to-Order) manufacturing cannot be outsourced. The unique one-of-a-kind products manufactured are produced and completed in the customer’s site and are modified as an engineered work-in-progress. It is this specific geographic requirement that provides these manufacturers a global competitive advantage.

The term engineer-to-order (ETO) denotes a style of manufacturing rather than a specific industry segment. Other synonymous terms are “project-based” or “custom” manufacturers. ETO companies typically have distinct characteristics about the way they conduct business that differentiate them from discrete or repetitive manufacturers.

ETO companies build unique products designed to customer specifications. Each product requires a unique set of item numbers, bills of material, and routings. Estimates and quotations are required to win business. Products are complex with long lead times, typically months or even years. Unlike standard products, the customer is heavily involved throughout the entire design and manufacturing process. Engineering changes are a way of life. Material is purchased not for inventory but for a specific project. All actual costs are allocated to a project and tracked against the original estimate. Once complete, the product is typically installed at the customer’s site. In most cases, aftermarket services continue throughout the life of the product.

Lean Manufacturing in the ETO Environment

Lean is a business philosophy focused on eliminating waste. Lean means doing things as simply and cheaply as possible, while providing superior quality and very quick delivery. Waste has many forms including material, time, idle equipment and inventory. Most companies waste a large percentage of their available resources. This represents a significant opportunity for cost savings. Lean Manufacturing helps to improve material handling, inventory, quality, scheduling, personnel and customer satisfaction.

Much of this waste is invisible. Identifying and eliminating the waste is not always easy. Lean manufacturing is a standardized process to remove waste. The main principles of Lean Manufacturing are:

• Pull Scheduling (e-kanban) to reduce inventory and reduce cycle times

• Rapid Setup – to reduce lot sizes and inventory

• Team Development – to implement the new processes

• Value Stream Mapping – to identify value added and non-value-added activities

• Cellular and Flow Manufacturing – to reduce travel distance and simplify routings

Dramatic improvements from Lean Manufacturing implementations and continued process improvement includes:

• Increase productivity by 40-60%

• Reduce inventory by 50-75%

• Improve quality by 50-70%

• Reduce lead time by 25-75%

Just because ETO manufacturers have a unique geographic advantage does not preclude the utilization of lean manufacturing techniques and approaches. According to Chuck Stewart, Executive Vice-President with Cincinnati-based ETO ERP leader, Encompix, “There is a perception that lean is only applicable for repetitive manufacturers and not engineer-to-order [ETO] manufacturers that make unique, complex products. Part of the problem is that many lean success stories focus on inventory reduction. This is of no interest to an ETO company that makes many “one-off” purchases and does not hold finished goods inventory.”

Some of the best opportunities for improvement in the ETO environment are in business processes and office systems, not merely the plant floor. Eliminating non-value-added activities in engineering, estimating, customer quotations, purchasing, shop floor reporting, and accounting functionality offers opportunities for dramatic improvement.

ETO Manufacturers find Global Competitive Advantages:

Lindquist Machine Corporation

Located in Green Bay, WI, Lindquist Machine Corp. (LMC) builds custom machines for U.S. and international customers. The industries LMC serves include food, printing, paper, film, construction and power tools. LMC began an extensive process that improved profit margins and reduced time-to-market by adopting and adapting lean principles to an engineer-to-order environment.

According to Joe Zimmer, LMC’s CFO, “We are a company that has always looked at making major improvements to our business processes to keep up with the marketplace. In January 2000 we realized that we hadn’t undertaken a major journey in several years. In 1995 we became ISO-certified, and in 1997 Balance Scorecard approach for continuous improvement was initiated. As we investigated the lean concepts, we realized that this was something that really allows a company to differentiate itself, and if we could pull this off we would be set for the future.” Zimmer realized that LMC costs were not in line with the marketplace. Their goal was not to lose business by price by more than 10 percent. Another area that lean improved was time-to-market. “Our goal was to shorten our delivery time, be faster to market. Our customers often sell the machine, and they can win the business by being faster than their competition. We do not lose any business due to an inability to deliver on a timely basis.”

Bottom-line lean manufacturing results for LMC are impressive. Gross profit is 15 to 20 percent higher than on similar jobs before lean. Parts that LMC is running through a cell, where one person is doing the machining and welding are 50 percent more efficient than parts sent to individual work centers. Internal transactions have been reduced by 40 percent; i.e., 40 percent less paperwork is produced.

Zimmer was especially proud of the fact that, “We have four customers that see us as such a real opportunity to be successful, that they have full-time people physically located in our facility. On average, we have two or three additional customers that are here part of the week. We really have become our customers’ manufacturing arm.”

Exactly who is ETO?

With so many industry sectors addressed in the ETO manufacturing process it’s often difficult to determine which firms constitute ETO. Below is a partial list of some of the ETO applications:

• Dies, Tools & Molds

• Machine Tools

• Industrial Cranes and Hoists

• Farm Machinery & Equipment

• Metalworking Machinery

• Construction Machinery

• Foundry Equipment

• Mining Machinery

• Industrial Automation Equipment

• Oil & Gas Equipment

• Medical Equipment

• Industrial Tractors and Trailers

• Custom Boat Builders

• Power Generation Equipment

• Conveyors & Material

Handling Equipment
• Food Industries Machinery

• Paper Industries Machinery

• Transportation Equipment

• Communications Equipment

• Fabricated Metals

• Custom Sign Makers

ETO companies consider themselves a hybrid of manufacturing and construction. Stewart suggests, “When it comes to solutions, these organizations can’t find a good fit. Some companies that are more manufacturing-focused have implemented ERP packages and supplemented with project-based spreadsheets. Others who are more of a construction company have implemented a solid project-based construction package and have left the manufacturing side alone.

During the past seven years, these ETO companies have spent a lot of time and effort implementing software only to have half of their needs unfulfilled and are now re-entering the marketplace unhappy with their current lean manufacturing and ETO ERP solutions.

A handful of ETO vendors have tailored their solutions to meet the hybrid needs of true ETO manufacturers. For example, ETO manufacturers often hold a project kick-off meeting where the scope of work, timeline and “buckets” of time and money are discussed. Traditional construction software helps manage this information; traditional ERP software does not. At the conclusion of the meeting, the department manager may work with the engineering manager to schedule 400 hours of labor within the next three months. Traditional ERP packages allow companies to graphically slot in who will work when while traditional construction software packages will not. ETO vendors bridge the gap between traditional ERP and traditional construction software solutions.

Software Solutions that Keep the ETO Manufacturer Lean: Krauss-Maffei

When Krauss-Maffei, a manufacturer of centrifuges and dryers, spun off its process technology product line, the company left the new organization with a software solution challenge. “The parent organization decided that our line didn’t fit with the company’s core competencies and spun us off with little notice,” says David Beitz, manager of after-market services at Krauss-Maffei Process Technology. “We had to build a new facility from the ground up, and we didn’t want to duplicate the old VAX-based system in the old facility.”

Tapping Beitz’s previous experience in selecting an ERP system, the company put him in charge of a team to select a new solution. Krauss-Maffei Process Technology went live with a new system January 2003. “We knew some limitations of canned ERP packages that were designed for high-volume make-to-stock operations,” Beitz says. “We needed a solution for a low-volume, high-dollar business. We typically have 10 to 15 orders per year with eight to 10 months lead time on each order. We have a large bill-of-materials for a variety of different parts and we manage many revisions and changes. We needed a great deal of flexibility in the system, which is where, in my opinion, most ERP packages fall short.”

Since implementation, Krauss-Maffei Process Technology has achieved very accurate job costing and labor tracking. “We have a finite potential customer base in bulk pharmaceutical and chemical companies,” Beitz says. “When we complete a job, we know what our cost was and what our margin was so that next time we can make even better decisions.”

Krauss-Maffei has also reduced the human errors in its bill-of-materials management. The company has streamlined its $1.5 million after-market and field service business, as well. “We reduced the time from receiving a customer call to shipping a spare part from five days to same day through the software and improved business processes,” Beitz says.

The ETO Institute: Global Competitive Advantages to North American

ETO Manufacturers

The ETO institute is a nonprofit organization committed to helping North American engineer-to-order (ETO) manufacturers compete more effectively in an increasingly competitive global environment. From articles to white papers focused on manufacturing and, in particular, engineer-to-order, there is also a bulletin board providing a forum for organizations to share ideas and information and to discuss challenges and business issues.

Why The ETO Institute?

While there are many trade organizations focused on specific industries, ETO manufacturers are defined by the characteristics of their business processes rather than by a single industry group. The goal of the ETO Institute is to help companies with similar business issues, regardless of industry.

Challenges Facing ETO Companies

The manufacturing recession from 1999-2003 within the North America economy, resulting in the loss of over 2.5 million jobs in the United States alone. The machine tool industry for example, is down 50% from its peak. ETO companies were affected differently than repetitive manufacturers, as they rely on a small number of high value contracts from a small number of customers. In the repetitive world, the loss of one order may not have had a significant impact on the company; in the ETO world, the loss of a large contract can be devastating. After all you cannot reduce an order size of one!

Many domestic ETO companies are weaker and many have closed their doors forever having not survived the loss of “the big order.” Those ETO companies that survived are now thriving because the products manufacturers simply cannot be outsourced and produced globally, when so much of the installation must occur on the plant floor. While this distinction provides a competitive advantage, ETO companies must operate at optimum lean efficiency to thrive in today’s global economy. North American manufacturers can be competitive in the global economy but must adopt new technology and business processes.

Unfortunately many ETO companies that decide to invest in new technology make the wrong choice. This is primarily because they could not find the right information to make an informed decision. Many of the vendors that provide solutions to ETO companies are niche players in their respective markets and are not as well known as their larger rivals. The ETO Institute has become a resource to help ETO companies find the right solutions to maintain a lean methodology and appropriate technology.