Make-to-Forecast and Make-to-Order Systems Fail CFO’s of Engineer-to-Order Companies

By Thomas R. Cutler

A system originally designed for Make-to-Forecast (MTF) and Make-to-Order (MTO) businesses will fail the CFO of an Engineer-to-Order (ETO) company. The differences are staggering.

Historically, most large manufacturing companies have built pre-designed standard products such as refrigerators, automobiles and other consumer products. This business segment was the first to implement integrated business systems to improve productivity. The focus was on the plant floor, organizing and streamlining the production process. Product design had no impact on the time to build existing products.

The business systems designed for these companies are entirely centered on shop productivity and fall into two categories: Make-to-Forecast and Make-to-Order. Make-to-Forecast and Make-to-Order systems are designed as Process managers not Project managers. Typically CFO’s of these organizations do not require these systems to track committed costs (essential for ETO firms) only actual costs, usually batch costs. Both MTO and MTF systems ignore the critical role and needs of Engineering and Purchasing.

Make-to-Forecast systems are used by companies that build items that are put in inventory. These software systems have their roots in the Material Requirements Planning (MRP) systems that originated in the 1970’s for big mass production companies. MRP was designed strictly to solve manufacturing problems, particularly plant scheduling and routing. They are structured to collect information on production batches. They are not Project based; they are not designed to track costs to a specific client order. Materials are purchased to Inventory and released to the plant for manufacture. Shop scheduling, parts routing, machine loading are critical to speed up production. These companies employ planners and schedulers to run these systems.

Make-to-Order systems are designed for companies who do not build to stock but begin manufacture once they have an order. As with build-to-stock firms, product design is not a constraint because the design exists at the time of the order. A typical MTO user is a machine shop. Their client provides the design and Bill of Materials (BOM), which is then entered manually into the program. There is no attempt to deal with constant additions or changes to the BOM. These MTO systems do job costing but not Project costing (roll up several job costs into total project costs).

Engineer-to-Order systems are designed to resolve several core problems; the most important being the speeding up of the definition and acquisition of materials. The time it takes to produce a product in an ETO company is totally dependent on how long it takes to define the items on a BOM and acquire these materials. This is complicated by the fact that designers are required to release the BOM in stages, not all at one time. They must also deal with change requests from the client and manufacturing throughout the project. This type of concurrent engineering ETO firms need a system designed for this type of concurrent engineering that dramatically reduce the time to create, control and release information to Purchasing.

Dennis Parass, of Burlington, Ontario-based Questica, (www.questica.com) noted, “Every business needs to improve profits, reduce costs and build better products. We all want to shorten cycle times, manage cash flow, identify profitable products and deliver on time and on budget. But project oriented ETO (engineer-to-order) manufacturers have special areas of concern that are critical to their success.” Engineer-to-Order systems must address the unique information needs of management. ETO firms build special or custom products with unique estimates for each order. They need a Project based system, not a Process based system, which allows them to estimate, price and track costs on each project. Unlike MTF and MTO businesses, they need to track costs versus estimate during the design and manufacturing process. They can not wait for the actual job costing that is provided after shipment. Consequently, ETO systems need to provide committed costs as well as actual costs to management.

Parass also noted that, “ETO systems are unique in that they are designed completely from the perspective of an engineering critical company where the big savings in time are found in addressing the engineering to purchasing relationship.” Project and job management with commitment costing are essential features for ETO firms. MTF and MTO systems are inherently not structured to deal with needs of ETO firms and those system vendors who have attempted to offer an ETO version are greatly limited by their underlying structure and generally have had little success in the market.

Author Contact:
Thomas R. Cutler
TR Cutler, Inc
Email: trcutler@trcutlerinc.com
Website: www.trcutlerinc.com

About Author
Thomas R. Cutler is the President & CEO of Fort Lauderdale, Florida-based TR Cutler, Inc, (www.trcutlerinc.com). Cutler is the founder of the Manufacturing Media Consortium of three thousand journalists and editors writing about trends in manufacturing. Cutler is a member of the Society of Professional Journalists, Online News Association, and American Society of Business Publication Editors, as well as author of more than 300 feature articles annually regarding the manufacturing sector. Cutler can be contacted at trcutler@trcutlerinc.com.

Printer Friendly

Email Page

Sponsor Message