ETO / engineer to order manufacturing explained.  ERP in MTS, JIT and ETO manufacturing environments
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What is engineer-to-order / ETO Manufacturing?

If you want to know what engineer to order manufacturing is or what makes ETO manufacturers special and whether ERP systems can benefit you then the information on this page should help with the definition and explanation.

ETO manufacturing can be defined in terms of the products that ETO manufacturers produce, i.e. 'products whose customer specifications require unique engineering design or significant customisation. Each customer order results in a unique set of part numbers, bills of material and routings' - [Greene, 1997].

Manufacturing companies are far from standard and not all are suited to ERPsystems. Most obvious in the differences between manufacturers are the variations in size, resources, technology (e.g. ERP, manufacturing equipment and tools) and end products. Behind these distinctions though there are differences in their automation and collaboration technology needs and these are reflected in their partnerships as well as in the enterprise solutions they choose to facilitate the efficiencies they strive after. The interaction between suppliers and ETO (engineer-to-order) manufacturers, for example, is far more critical than that between suppliers and their repetitive manufacturer customers. In many cases, the materials required by ETO companies are unique to particular jobs / projects or are ordered infrequently. Lead times are typically compressed, with tight scheduling leaving little scope for error.

The nature of ETO manufacturing compared to other manufacturing styles presents its own set of challenges which must be addressed effectively if the company is to remain competitive, these distinctions make a tremendous difference in how ETO manufacturers handle their ERP (enterprise resource planning) and SCM (supply chain management) requirements.

The table below highlights some of the key differences between 'standard' manufacturing i.e. make-to-stock (MTS) or, latterly, just-in-time (JIT) style manufacturers, and their engineer-to-order manufacturing (ETO) counterparts. Note that engineer to order manufacturing companies are sometimes referred to as 'make to contact' or 'contract manufacturing' manufacturers (MTC manufacturing).

Make to Stock / Just In Time Manufacturing...
Engineer to Order / Make to Contact Manufacturing...
An MTS / JIT manufacturers uses a price list. An ETO manufacturer supplies estimates and quotes / tendes for a project.
An MTS / JIT manufacturer wins a sale / receives sales order. An ETO manufacturer wins a contract / receives a job order.
An MTS / JIT manufacturer purchases material to stock. An ETO manufacturer purchases material to a project.
An MTS / JIT manufacturer's inventory is based on part number. An ETO manufacturer's inventory is based on contract number / job order (i.e. top level demand).
An MTS / JIT manufacturer makes no or only a few engineering changes. An ETO manufacturer makes a significant number of engineering changes / variations.
An MTS / JIT manufacturer may make products having a low value. An ETO manufacturer's products / projects are typically higher in value.
An MTS / JIT manufacturer talks about Products. An ETO manufacturer talks about Projects.
An MTS / JIT manufacturer makes standard products. An ETO manufacturer's products are unique.
An MTS / JIT manufacturer refers to standard cost. An ETO manufacturer calculates actual cost.
An MTS / JIT manufacturer's product lead times may be days or weeks. An ETO manufacturer's product lead times may be months or years.
An MTS / JIT manufacturer ships from finished goods. An ETO manufacturer ships from WIP (work-in-progress).
An MTS / JIT manufacturer invoices on delivery. An ETO manufacturer receives stage payments (and retentions).
An MTS / JIT manufacturer measures cost variance from the standard cost. An ETO manufacturer measures cost variance from the original estimate.

Many ETO manufacturers think they can use a standard ERP system however a standard ERP system developed for repetitive manufacturing is not appropriate for ETO manufacturers and this translates to, at best, sub-optimal efficiencies for the ETO manufacturer. By using an ETO ERP process the improvements can be impressive and benefits include full system integration, access to consistently accurate financial data to enable more informed decision making, access to extensive up-to-date job status data and early warning of potential problems, perpetual inventory and enhanced inventory control, and capacity planning for improved on-time delivery.

These critical distinctions between MTS and ETO manufacturing show up in every phase of the supply chain, and the usual workaround solutions that hold up for make-to-stock enterprises fail to deliver for engineer to order companies. ETO manufacturers need to evaluate a potential solution's ETO-specific capabilities in depth and prior to investing in the system.


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Please contact Austen Jones with any questions, comments or suggestions.

Last Updated: 27-Mar-2008