We solved Engineer-to-order procurement challenges
The more complex manufacturing gets, the more collaborative its procurement process needs to be. For the most advanced manufacturing method, Engineer-to-Order (ETO) production, procurement means a balancing act of an array of needs in constantly changing conditions. In this article we dive deep into the Engineer-to-Order procurement challenges and give you the tools to fix them.
As a procurement manager, you face responsibilities that are simple in principle:
- Ensuring that your company has all the material they need, and subcontractors ready to take the orders.
- Constantly reducing costs and making sure you pay an optimal price for goods and services.
Depending on the manufacturing industry type you’re in, real life can be more or less challenging. If we take the Make-to-Stock industry, your biggest challenges are balancing the optimal stock level and adjusting reorder points.
On the other end of the manufacturing spectrum, the Engineer-to-order (ETO), your challenges revolve around the constantly changing environment, unpredictable needs and constantly fluctuating volumes with suppliers. On top of all this you have to satisfy the needs of all of your requesters and ensure optimal cost level. So the procurement manager is more like a procurement project manager when working in an Engineer-to-order company.
READ MORE: How to Manage Project Procurement Challenges?
Why is procurement in Engineer-to-order manufacturing so hard?
To answer lies in the core concept of manufacturing procurement - the Pull vs Push system.
The push system is convenient for procurement
In the Push system, items are manufactured to stock. Consumption is typically based on a sales forecast. This is ideal for procurement since you can agree on long term contracts and commit purchasing volumes with suppliers.
Typical push system manufacturing example is Make-to-Stock (MTS) which is used in consumer goods, food, etc.
The Pull system is a challenge
The Pull system is a lean manufacturing principle created to reduce waste in the production process. This offers great benefits for the manufacturing and optimises the flow. However, it’s a lot more complicated seen from a procurement perspective.
On the one hand, the goal is to minimize stock levels close to 0. Procurement also needs to optimise lead-time and ensure the best possible price from suppliers. On the other hand, they need to ensure availability by on time delivery.
That means constant price benchmarking and rapid information exchange with suppliers. Pull manufacturing systems are initiated by order: make, assembly or engineer. Engineer-to-Order is the longest process of them all and includes either make or assembly.
Typical Engineering-to-Order examples include project manufacturing, manufacturing based on customer-specific requirements, but also construction of unique buildings.
The biggest challenge in ETO procurement - communication
In ETO, the production process starts with the customer’s request for price estimation. This kicks off a thread of internal communication between different company functions, involving sales, engineering and production. In the top-rated manufacturing companies, procurement is also involved from the early engineering phase.
At first, the product will be made on paper. Design engineers consider different options and request components’ cost estimation from procurement. Procurement category managers will contact suppliers and ask information or proposals. Often the requests coming from the engineering are ambiguous and suppliers need to ask for clarifications.
This starts a telephone game between the suppliers, buyers and engineers. Now imagine this same thing going on around several items with several suppliers that all ask for clarification. Would you imagine handling that communication mess in a regular mailbox where you keep the rest of your mail? We can guarantee you’ll loose grasp of who was asking what from whom and what was the answer in no time.
In the ETO process, the first steps of object clarification usually waste the most time. Project scope and BOM (Bill of Materials) need to be harmonised throughout the whole process, starting from the customer and ending with component suppliers. Using email threads with multiple participants can result in very costly misunderstandings.
Case study: a real-life procurement saga of an ETO company
In ETO, everything starts with a customised sales offer to the customer.
In a global Engineering-to-order company, KOBE Elevators Inc. the sales team is quoting for Brent-Haagen neue Hall project. This is a complete building renovation project and needs to have elevators reaching from ground floor to the 6th floor. The entire project consists of 3 elevators.
To get started, the sales team makes an offer to the customer without consulting with the procurement team. This is common in many companies due to not having enough time to make proper preparations. There have been cross-industries discussions about the importance of involving procurement early, but the reality in most companies is still quite different.
Making a sales offer without procurement involvement means that material prices are mostly estimates based on previous offers.
To everyone's surprise, the offer is accepted and signed by the management team.
Once an offer is accepted, it becomes a sales order and the initial offer is converted into a project budget. The budget is split between COGS and gross margin.
This is also the first time when KOBE Elevators inc. procurement gets involved in the process and starts working with suppliers. They quickly find out that the offer is far from the actual circumstances. At this point the procurement team is already late to the table and should have fixed deals in place and materials on their way.
Normally they can’t go back to sales and ask to increase the budget. That could potentially jeopardise the whole KOBE deal and this is the last thing that sales would like to do.
This situation puts the following expectations on procurement:
- availability of multiple sources cross categories;
- speed in sending out multiple RFIs;
- ability to work under pressure and keep the process under control.
How does the procurement handle this situation?
Team lead quickly splits entire BOM between categories and every category lead starts to validate prices one by one. At this stage the biggest challenge is to get correct drawings from engineering, since most of the non-standard details are somewhere in between customer, sales, support and engineering.
How does the procurement solve this challenge?
- Procurement starts to work with a long list of suppliers and first massive RFIs are sent out for most expensive or complicated products.
- They go down from a long list to a short list of suppliers.
- Typically at this stage, preliminary drawings are available and procurement can continue with sending out RFP-s or RFQ-s.
- Supplier is nominated and PO is released.
This looks like a normal flow, but you should also consider the time pressure, as well as the volume of tens fo RFIs issued within one project. You can easily lose overview and make mistakes by getting tangled in endless email threads. If additional changes are made to the drawings or specifications in the middle of the project, the procurement card house can fall apart altogether.
This means frantically working overtime for the KOBE procurement team and scrambling to keep everything under control.
How Engineer-to-order process looks without procurement software
- Inquiry from a potential customer pops into the sales mailbox.
- Sales forwards it to engineering to create the first draft.
- Engineering asks component estimation from procurement.
- Procurement asks for component estimation from suppliers by making an RFI/RFP.
- Suppliers ask clarifying questions.
- Procurement mediates questions and answers back and forth between suppliers and engineers.
- Finally engineers get the first draft and price estimation ready. They forward it to sales who make an offer to the customer.
- If an offer is accepted and the customer places an order, the project manager takes it over from sales. Engineering finalizes the BOM.
- Procurement makes a real RFQ.
How Engineer-to-order process looks with procurement software
Cloud-based procurement software, such as ProcurementFlow helps you manage BOM-s and contact hundreds of suppliers throughout the RFI process. This way the procurement team can work more effectively and spend less time going through various email threads and updating purchasing excels. Sales managers and project leads have all the relevant information in front of them and everyone knows the latest status.
ProcurementFlow can be used right from the beginning of the ETO procurement process.
- Engineering creates preliminary BOM and uploads PR. Procurement receives it in ProcurementFlow.
- BOM is quickly reviewed and split according to product categories. Some items can be shifted directly to PO. Similar parts will be bundled together and assigned to different procurement team members.
- The original PR is seen as a whole even after the PR split. There is a position and the person in charge listed after every line item.
- Procurement starts several simultaneous RFI-s to collect component estimations from suppliers. You can answer the suppliers immediately and keep communication with multiple suppliers in one place.
- All conversations with internal and external stakeholders are seen in the collaboration feed. You have a good overview of the status of each component and supplier.
- Requester can follow up its request statuses and the information collected.
- When a customer accepts the offer, it’s easy to move on the procurement process with the next round of RFQ or PO.
- This results in huge time savings on communication and running multiple rounds of e-sourcing events simultaneously.
Which procurement software is best for ETO manufacturing?
Engineering-to-order is the most complex manufacturing type and regular procurement tools don’t support the process. Typical procurement tools help collect the items and make purchase orders or sourcing events. These are often disconnected from the actual project and lack complete overview.
ProcurementFlow is the only tool on the market which starts with an early procurement BOM. It runs through the entire project lifecycle until there are suppliers available and prices set for every line item. Communication with suppliers, as well as internal requesters is kept in threads right next to request. This saves around 50% of procurement time.
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