“How to Keep Your Customers When Their Demands Change”
When Customer Demands Change
Will You Be Able to Deliver?
“How to Keep Your Customer When Their Demands Change”
Your largest customer has informed you that starting next month; you must provide 5 new selectable options to their standard product. You have been shipping the standard product for well over 10 years, and now must find a way to allow options throughout your order entry and production processes. They also want 5 different packaging styles, depending on where the product will be shipped. Non-standard changes such as these can also surface in the form of an email from one of your reps, or a tweet from one of your main distributors. The result is that they all can cause a spin of what we call “The WOM (Wheel of manufacturing)”.
Remember the days when customers bought whatever you built? Ah, the joy of coming to work and knowing exactly what you would be building, exactly how many you would be shipping, and that additionally, there would be plenty of related component parts. As Henry Ford famously said about the Model-T, “you can have it in any color you want, as long as it’s black”.
As a manufacturer today, your ERP system must support every type of demand and product variation that your customer may conjure up. Should you lack the ability to meet these requirements, you might as well look into buying that donut franchise that your wife has always wanted.
Production Planning Models
This article will review 6 major categories of manufacturing planning and control models that you must prepare to accommodate, or risk losing some serious future business.
Production Planning Models
1) Ship from Stock-MTS
2) Assemble Standard Product to Order- ATO
3) Build Standard Product to Order- BTO
4) Configure to Order- CTO
5) Repeat and Tweak to Order- Same as except
6) Engineer to Order- ETO
Each of these models has advantages and disadvantages in the right circumstances. A few of the larger factors are summarized in the charts below:
As you can see, there are models that can be selected when the customer demands more variability in their product profiles, and as we will see below, advantages and disadvantages of using each of the models.
Production Planning Models: Ship from Stock (MTS)
This common model is typically used when the time to manufacture plus order and delivery time is longer than competitive fulfillment time. It can be one of the more expensive models because of the costs of inventory, obsolescence, and quality rework. It is particularly expensive in products with high cost components, erratic demand patterns (inventory aging and obsolescence), or products that change frequently. It is sometimes also used in to-order manufacturers who have a product or two that needs to be built to a forecast and shipped from stock. Capital equipment manufacturers may also use this model because 20-30% of their revenues can come from the stocked replacement parts/spares business.
The ERP applications that must be implemented and maximized for this model are Forecasting, Master Scheduling, Inventory Management, CRM, and to completely maximize your fulfillment capabilities, eBusiness.
Forecasting
In this model, the art and science of forecasting can be frustrating to say the least. A focused forecast technique along with the capability to make your own intuitive adjustments will put you in the best position to generate do-able forecasts (assuming your ERP system has this). Some products also lend themselves to a forecasting technique called family forecasting. A group of similar items with minor variations are forecasted as a group or family and then, through percentages, is distributed among the family members.
Master Scheduling
The MPS (Master Schedule) application is typically the most critical function in a Ship from Stock (MTS) environment. Creating a solid Build Plan that both balances the supply and demand and provides feedback on the accuracy of your forecast is critical. It ultimately provides a stable environment for your production area, which is a key to efficiency. Some other key capabilities for a solid MPS include the ability to smooth forecast error, set multiple time fences, and to perform a sanity check on the MPS using a RCCP (Rough Cut Capacity Plan) function.
Inventory Management
Inventory Management is as an application critical to any of the 6 models. But in a ship from stock environment, particular attention must be focused on inventory levels, carrying costs, as well as purchased material costs. This helps to ensure that lower costs from long term vendor commitments translate into lower overall acquisition costs.
Other
There are two other capabilities that, when available in your ERP application, will aid in the ship from stock (MTS) process. The first is the capability where specific attributes can be defined and assigned to individual products to help identify viable substitutes and alternatives. For example, stocked products with varying sizes and colors may be substituted if the requested choice is not available. The second ERP function that can aid in a ship from stock environment is Kanban. A constant flow from supplier to customer can be developed with commitments made by both parties so that level production lines can be established and Lean principles implemented.
eBusiness
And finally in a ship from stock (MTS) environment, an integrated, full function eBusiness application is not just nice to have, but mission critical. Studies have proven that 70% of buying cycles are now completed before the customer ever contacts your sales force. People are now using the internet to research products that will solve their problems, and the better your web site is at answering their needs, the more traffic you will see.
Production Planning Models: Assemble Standard Product to Order- ATO
Moving clockwise on the WOM, we will now discuss an excellent model for providing the customer with some variability in how they can order, but with reasonable manufacturing lead times. This model is called assemble-to-order and allows the customer to order the product with various sub-assemblies which are then assembled at the time of order. This model also allows use of your standard discrete Bills of Material and Operational Routings.
Typically, level 1 sub-assemblies, final assembly components, and packaging are built to either a master Schedule or a Kanban. This allows for a very stable production environment with long, consistent runs.
Although some customers may initially object to the longer lead times compared to shipping directly from stock, they soon learn that this style of supply is typically ships more reliably and offers a lower price. Most customers consider the benefits well worth the minimal extra lead time.
There are two primary benefits to this approach for the manufacturer. The first, and most obvious, is that the dollars invested in inventory are lower. The products are built to a lower level of completion with less material, labor, and overhead being added. For a second benefit, there is more flexibility for both the customer and the manufacturer. Common final assembly components are easily assembled into a variety of products and can easily match shifts in demand for individual items.
The areas of ERP that must be implemented and maximized for this model are Master Scheduling, MRP, and Direct Fulfillment.
Master Scheduling and MRP of Level One Components are used to build and buy all the items needed to subsequently assemble the standard products when an order is received.
A tool called Direct Fulfillment calculates a delivery date and schedules a shop order, as the customer order is entered. These promise dates are more “real” since they are based on both current inventory availability and open production capacity.
Production Planning Models- Build Standard Product to Order- BTO
In this production planning model, the product has a standard bill of material BOM, but the product often involves expensive materials or a potentially elaborate production process. This can make it challenging because the manufacturer must be able to deliver within acceptable lead times, yet is not interested in stocking products that are costly to build and high in inventory costs (carrying costs, obsolescence, and rework).
Engineering, from both the design and industrial disciplines, should be enlisted to ensure which key sub-assemblies can indeed be built ahead of time, and to review whether cellular manufacturing could be considered to streamline the manufacturing processes. .
Again, as in any “to-order” environment, forecasting and inventory levels for pre-final product items must be calculated using historical demand patterns. Use of Planning Bills of Material, and Master Scheduling, are similar as in the model for a ship-from- stock (MTS) environment.
The areas of ERP that must be implemented and maximized for this model are similar to ATO, with the addition of Shop Order Explosion.
Shop Order Explosion creates multi-level shop orders for the entire BOM of the item being built to order. All these shop orders are tied to the customer order, each other, and a job cost record. This enables the BTO manufacture to build complete products all under one planned cost unit.
Production Planning Models- Configure to Order-CTO
Product Configuration has been in use for many years, and has multiple variations. These range from the simple selection of final assembly features and options, to deep multi-level variations using a matrix BOM and Rules-Based Calculations. In order to adapt to these specific customer demands, a full featured ERP application is used to accommodate the spectrum of all these variations.
A fundamental difference between this approach and building a standard product to-order (MTO) is that in a CTO environment, there are no stock-able finished item numbers. Customer Orders are entered for a product line and then the order selections determine the make-up of the BOM and the operations needed.
For example, a manufacturer could offer ball point pens with selections for barrel material, top color, ink color, package, and so on. If this was built in a to-stock (MTS) or to-order (MTO) environment, there would be a unique BOM and Routing for each permutation of a pen. With only a few selections, there could be 1,000 to 3,000 different items, BOM’s and Routings.
By using a configure-to-order approach, a product line of pens would have one (1) BOM and one (1) Routing organized as matrixes. Think of it as a spreadsheet with components listed down, with each feature and option listed across the top. At customer order entry, the selections would then be made (style, color, ink, package, etc.). The pre-determined correct component and operations would then be automatically selected, and a unique BOM and Routing created. This BOM and Routing would then be processed as any other normal build-to-order item would be.
An even deeper use of product configuration (especially for capital equipment) would allow component selections at all levels within the configured BOM. For example, if voltage was selected to be 240 volts, then when exploding the product BOM and arriving at the motor component, the 240 volt motor would be selected (as opposed to some other voltage). Customer selections are automatically converted to the right components.
Lastly, a CTO approach may also incorporate rules-based calculations for certain component quantities or operations. The order entry person would be prompted for size or other calculation data, the program would perform the calculation, and the result would be used to build the product.
Many Production and Inventory Control Practitioners believe that the CTO model is one of the most beneficial from a customer service, production efficiency, and inventory cost perspective. They also suggest that this model should be used when and wherever possible.
CTO is a production model that combines the best of desired outcomes. Inventory is primarily comprised of purchased material low in value, and options that have minimal labor added. Yet, these options are very “valuable” since they can fill a wide variety of demand.
CTO provides the best model to deliver an unlimited number of product permutations in an acceptable delivery time. It does add some time to the delivery cycle, but is usually competitive when considering the expanded offerings. And finally, CTO allows you to separate the variability of the options from the main product which usually results in more stable production levels, and higher production efficiencies. CTO’s biggest challenge is the management of a re-engineering effort that involves all areas of the enterprise including, finance, production, engineering, and sales.
The areas of ERP that must be implemented and maximized for this model are product configuration, and the matrix bills application.
Product configuration allows you to set up options and features in your order management system that then automatically creates BOM and routings for your shop floor. Your customer receives the broad selection they desire, and you benefit with lower inventories, faster builds, and less obsolescence.
Matrix bills give you the flexibility to offer changes deep within the BOM. It simplifies your business and avoids the thousands of BOM’s that would otherwise be necessary.
Our last two categories, in bygone times, would probably have been classified as “Job Shop” approaches.
Production Planning Models: Repeat & Tweak to Order – Same as Except
This production planning model requires functionality not found in many ERP applications. It includes the ability to copy and modify standard BOM’s, Routings, prior Shop Orders and Estimates, and then to build unique estimates with those changes. It gives the opportunity to use past builds and to ask the question “What if I only changed this?” Naturally, it is quite a bit faster and accurate than starting from scratch. These, what-if functions are then used to develop the price and margin data. A manufacturing estimate can then be thought of as a sandbox where an engineer can take advantage of prior knowledge and other similar products to quickly make changes and develop a new template that can be passed to order entry and on to production for manufacture.
Customers usually require quotations and quantity price breaks, so the ability to manipulate labor rates, GS&A factors, and other items is quite efficient. This also allows the preparation of prototypes with different component scenarios, which is also very important.
The areas of ERP that must be implemented and maximized for this model are Quoting and Estimating, Direct Fulfillment, and enhanced Purchasing.
The Quoting and Estimating application is key in providing the customer with the ability to make incremental changes and see the results. The estimate can then easily be copied into a customer order, and then scheduled to a shop order.
Direct Fulfillment then provides the calculated delivery date, based on actual inventory levels and open production capacity.
Purchasing also has a unique role by easily providing the information needed on alternative parts, suppliers, when necessary.
Production Planning Models- Engineer to Order-ETO
Large Capital Equipment Products, with 2 -6+ month lead times, require many of the abilities already discussed under CTO and Repeat to Order. In some cases, it also requires cellular manufacturing.
The areas of ERP that must be implemented and maximized for this model are enhanced Product Costing, Document Management, Quoting and Estimating, Direct Fulfillment, and enhanced purchasing
As in most “To-Order” processes, product cost is a major consideration. This is particularly true in the ETO world. Many companies are now building company-wide costs into the ETO order, including pre-production costs such as quoting, customer communications, engineering, prototyping, and outside services. In this way, an accurate picture of cost is developed and cost lowering improvements can be made. Your ERP system needs to contain the unique features to handle this type of costing.
Another ERP feature required in an ETO environment is the capability to attach Drawings and other documents to both the customer order and to the resultant shop order generated, to provide a uniform picture of what needs to be done.
Also helpful, are the use of various BOM tools such as modular BOM’s, and Phantom or “Blow-Thru” BOM’s, to collect groups of components under kit numbers.
Mixed Mode
Each of the 6 planning models has distinct advantages to satisfying your customer’s needs. Each model also has distinct consequences for your business. But, what if one customer worked best under one model and another customer would work best under a different model? The answer is mixed mode, where the different models can be freely applied under the same ERP system. This, of course, is dependent on the breadth and depth of your ERP vendor, their products, and their experience. Always check the references of existing customer to make sure that mixed mode successes are in their past repertoire. Lastly, make sure that their people understand the full spectrum of mixed mode, so you won’t be pushed into one model of their experience. (Using a hammer to apply screws)
Production Planning Models Summary
This discussion was intended to show that no manufacturing company can assume today’s customer demands will be the same tomorrow. The only thing constant with your customers’ needs is that they will change frequently. Your ability to transform your processes, and adapt to those changes will enable you to either prosper or to slowly expire. Adapt your organization now to be ready for everything that your customer might need, and offer the right production planning models to keep those customers.
Harry Mosesian, CFPIM
Tel: 772-341-2085