Digital Sales - Right CPQ for Manufacturing Environments
- Gianluca Davico
- Sep 19, 2019
- 11 min read
Updated: Jun 7, 2020
Hints for choosing the Right CPQ given the Manufacturing Environments
This is the second article of the series “Sales Accelerators Technologies in the Manufacturing Digital Agenda: The role of DCMS & CPQ”
DCMS and CPQ as enablers for competitive advantage
Make the right choice: impacts of the manufacturing environments for the selection of the CPQ technology
Complexity to face running a CPQ implementation
How to maximize benefits from a CPQ implementation
In the first publication we have:
introduced around the competitive advantage and the competitive priorities that must be set in the operations and functional strategy;
described how the competitive advantage must be translated into order-winners and order-qualifiers;
analyzed the contribution of CPQ and DCMS technologies at building and sustaining competitive advantage around order winners and qualifiers.
Now we will deeply analyze how the different Manufacturing Environments set requirements and constraints for choosing the right technology:
we will introduce four Manufacturing Environments and their core characteristics;
we will analyze how each environment influences the sales process;
we will identify the main requirements and constraints that a CPQ technology shall accommodate to fit successfully into each environment.
Let’s go. Good reading!
Decisions that influence the choice of the Manufacturing Environment
The design of the Manufacturing Environment reflects the decisions a Manufacturer has made how to fulfill the demand coming from the market it has decided to serve, and how to organize its internal operations and its supply chain links (upward & downward). The choice of the Manufacturing Environment is a mix of Marketing, Operations and Financial decisions.
Marketing Decisions: which market, market segments and customer types do we want to serve; with which products/services; what the breadth of the product range and how much degree of customization and options do we want to offer; what are the market expectations about the delivery lead times; what the order winners and qualifiers for each specific segment; what the expected price each customer group shall pay? what the premium characteristics that can justify for higher price?.... etc.
Financial Decisions: what the desired level and investment in inventory? What the expected flow of revenues? What the expected industrial cost? What the expected profit margin? etc.
Operational Decisions: what the best manufacturing options to cope with the breadth of the product lines and the expected volumes of demand? How to accommodate the planning parameters? How to accommodate the expected delivery lead time from the market? Shall we produce on order or shall we base our production runs on a forecast? Where shall we place decoupling points? What the optimized run time to minimize production cost? ...and so on.
All these decisions define the characteristics of the Manufacturing Environments, in particular the design of the product structure and how to serve the market mainly influence the choice.
For example, a Yacht producer can decide to have 2 product lines:
A product line of entry-level Yachts that provides for pre-built options and characteristics to be chosen from;
A product line of exclusive Yachts that consists in providing architectural services to design from scratch the interior and exterior lay-out.
It is evident how each product line will require its own manufacturing environment, with a different involvement of engineering and different way to plan and execute to produce the end product, and a different sales process as well.
Four "Pure" Manufacturing Environment and 4 Hybrids
It is possible to identify 4 pure manufacturing environments:
Engineered-to-Order (ETO)
Make-to-Order (MTO)
Assembly-to-Order (ATO)
Make-to-Stock (MTS)
ATO presents also 4 variants / hybrid declination:
Configured-to-Order
Mass-customization
Postponement
Packaged-to Order
ETO – Engineered-To-Order
An ETO environment is the operational choice when a Manufacturer decides to serve its Market with fully customized products/services to accommodate specific and not recurrent requirements from each customer.
Customer will have a great influence on the product/service design;
Each product/service, although presenting some degrees of similitude to other, will be almost unique;
Delivery lead time includes a relevant portion of design and engineering and thus are expected to be long;
Volumes are generally very low.
In this kind of environment all the production schedule follows an order and the approved design:
A preliminary “Define phase” is run for requirements gathering. At this stage a preliminary high-level design to support the quotation can be executed (“Business Development” Design)
The detailed design is finalized when a binding customer order is received;
Materials are purchased when the order is received (stock can be carried just for low value common parts);
Production of sub-assemblies is made on the approved design: in some cases, sub-assemblies can also be produced in house and then moved to final assembly location;
Final assembly is typically done at the assembly site (Fixed-Position lay-out)
The main characteristics that influence the sales process and quotation are:
Product Variety: very high. There are generally no similar products to be used for quotation. Maybe some similitude for benchmark can exist to be used as a general reference
Volumes and Standardization level: very low. This means that cost to serve needs to be accurately estimated every time
Quality expectations are extremely high: it requires multiple testing phases (component test, assembly test and final customer acceptance)
Productive lay-out: on-site fixed position (even if the tendency is to try to maximize the production of sub-assembly in house). This means that costing the project requires a careful estimation of logistic costs to move subassembly from the manufacturing location to the assembly location.
Key performance metrics in this kind of environment are:
Skills: the engineering capability;
Speed: focused on meeting the promised delivery date;
Quality: conformance to promised specifications and processes;
Cost performance, as contracts are typically structured for a fixed price. Margins will be higher, however, because there are fewer competitors who can provide comparable levels of capabilities.
How those characteristics influence the selection of the right CPQ?
Pricing is generally based on a cost-plus approach: it may be a "designed to cost" approach, knowing the customer budget or given the need to offer a competitive price.
It is necessary to estimate the project cost at completion and its components for parts (purchased parts, manufactured parts) direct labor (manufacturing, assembly) other direct project costs (specific logistic costs, engineering costs, testing, etc.) and the absorption of indirect overhead as well.
It is necessary to simulate variation in the proposal (different materials, different assumptions about work, etc.) creating several proposal variants
Proposal document have little standardization, as the Statement of Work for the project may vary case by case.
The quotation process requires a strict cooperation between sales and product engineering
and the integration of the commercial CPQ with engineering systems. The qualifying characteristics to be found into a CPQ process for this scenario are:
An initial phase where sales people use the CPQ to define the product specs.
Then the specs are passed to engineering that defines the BOM (Bill-of-Material) for the project, define the WBS and their planned costs
In this phase it is important the possibility to search and reuse components defined from other projects.
Technical specs coming from engineering are then re-matched against initial specifications
This process may have a complex workflow between engineering and sales team
The possibility to version each quotation and to adjust them for simulation purposes easily is important: for example, add/subtract variants and components from each or selected versions; or remove variants from each or selected versions
The ability to perform complex cost calculation (direct costs and indirect costs allocation) directly or to get them from integration with ERP is a must as the cost-plus approach is adopted for pricing
CPQ requires an integration with CAD/CAM to capture quotation elements from the high level design in the Define Phase and to create quoted designs and technical documentation to be attached to the quote.
The winning characteristics to be found into a CPQ for this kind of environment should be searched in the performance to manage such complexity.
"For this kind of environment it is recommended to look at specific vertical technologies specifically designed for the ETO manufacturing environment"
MTO - Make-To-Order
MTO is the manufacturing choice when:
customer can choose between a wide breadth product catalog with highly differentiated products with many variants and options;
the differentiation starts early in the productive process so that volumes for each sub-assembly and each variant are quite low.
In MTO, manufacturing starts when the order is received. The product is usually made of:
standard raw materials in inventory
multiple variants/options obtained by pre-designed components
some custom-designed components that does not requires extensive engineering and long design lead time like in ETO.
the work still proceeds in an intermittent fashion, with testing at different stages before handing the product off to the next layer of development.
The main characteristics that influence a sales process and the quotation are:
Product Variety: high. It is possible to order the product with many variants that differs in the selection of the components
Volumes and Standardization: Medium/low. It is necessary to know very well the cost impact of each variant according to the planned volume of each components
Tasks: are more repetitive than in ETO
Customer lead time: medium long, but shorter than in ETO
Key performance metrics in this kind of environment are:
Speed (meeting the promised delivery date)
Quality (conformance to promised specifications and processes).
Margins remains higher in this environment.
How those characteristics influence the selection of the right CPQ?
Pricing is generally driven by the possible variants in catalogue. Variants are generally based on pre-designed features: it should be possible to define the planned cost of each variant upfront and use those data in the Configuration process.
It is necessary to simulate many versions of the configuration as it is possible to configure the product with many variants having impacts on costs and price. Also in MTO the approach to price is generally a cost plus given the low level of standardization.
Proposal document have greater level of standardization than in the ETO environment and can be more easily automated
The qualifying characteristics to be found into a CPQ for this scenario are:
Define easily the Modular Planning BOM (the Bill of Material of the possible variants) of the end product.
Easy maintenance of the Planning BOM and constraint rules
Manage and roll-up costs of each variant with the possibility to modify costs in case of small customization that can happen in MTO
Simulation functionalities are required, although they do not require same level of depth and complexity as in ETO
The winning characteristics to be found into a CPQ for MTO environments should be found in the performance to develop and maintain the Modular Planning BOM, and to handle a medium high level of details.
"For this kind of environment it is recommended to look at specific vertical technologies specifically designed for manufacturing managing the modular planning BOM; generalist CPQ may fit but it is necessary to account for some customization to adapt to MTO requirements"
ATO - Assembly-To-Order
ATO is the manufacturing process choice when:
Manufacturer allows for less differentiation of the products with less variants and options than in ETO and MTO
The differentiation starts later in the production process so that variants and sub-assemblies can be produced in higher volumes,
The product design is modular
In ATO, as volumes are higher, components are manufactured based on MPS developed on forecast and then are stocked. An actual customer order triggers the Final Assembly Schedule (FAS) of the standard components stocked into the end product.
In short, the characteristics are:
Product Variety: medium
Volumes: medium /high
Standardization: medium/high
Tasks: repetitive
Inventory is carried at component level and thus are higher than in MTO
Customer lead time is shorter than MTO
In ATO the order follows a designated route through the shop to completion and shipping.
Key performance metrics in this kind of environment are:
As volume increases, cost performance becomes important
Dependability and quality become more difficult, but critical, to maintain.
Margins decreases compared to an MTO
Workers tend to specialize in one task
The four variants / hybrids of ATO are
Mass-Customization: Mass customization is an attempt to serve markets that desire both high volume and high variety. The product is available in many variants (configurable products) achievable from standard stock components, quickly assembled and in high volumes.
Configured-to-Order: Configure-to-order has the same lead time as make-to-order because the customer chooses a unique combination of features and options early in the manufacturing process. Unlike assemble-to-order, the components may not be manufactured until the order is received, but they are generally based on established designs. Components common to all units could be produced in advance and be assembled-to-order. If the process can produce at low cost and in high volumes as well, then it would be considered a type of mass customization.
Postponement: It is the opposite of Configure-to-Order it is “A product design or supply chain strategy that deliberately delays final differentiation (assembly, production, packaging, tagging, etc.) until the latest possible time in the process. This shifts product differentiation closer to the consumer to reduce the anticipatory risk, eliminating excess inventory in the form of finished goods in the supply chain” [1]. Postponement is an ATO strategy that often performs final assembly in a distribution center because the assembly usually does not require specialized equipment or extensive manufacturing expertise.
Package-to-order is a type of ATO that uses postponement to delay packaging items produced and stored in bulk until orders for specific package sizes are received.
How those characteristics influence the selection of the right CPQ?
Even in mass customization, variants are less than in an MTO and well know in advance and standardized. Each variant is planned in term of volume and it has its own determined cost and price well defined in advance.
Also, in this environment it is necessary to simulate variation to the configuration as it is possible to configure the product with many possible variants having impacts on price. In general, the number of variants, being less than in an MTO, does not require particularly complex simulation
Proposal document may be fully standardized and automated
Like in MTO, the qualifying characteristics to be found into a CPQ for this scenario are:
The possibility to easily define the Modular Planning BOM (the Bill of Material of the possible variants) of the end product
Easy maintenance of the Planning BOM and constraint rules
Easy update of list prices at component level
Versioning of quotes is important but does not require complex simulation capability like in MTO or ETO
Ability to manage pricing and discount rules that may be more complex than in MTO and ETO
The winning characteristics to be found into a CPQ for this kind of environment should be searched in the performance to develop and maintain the Modular Planning BOM, to handle numerous and complex list prices and pricing rules
Having each variant a list price, cost management functionalities are not strictly required and can be considered a nice to have. It shall be enough the ability to roll-up costs to determine the gross product margin.
For ATO it is possible to evaluate also generalist CPQ software as they can fit most of the requirements. Particular attention has to be dedicated to the availability and functionalities to manage the Modular Planning BOM to simplify the product structure and reduce redundancy in the configuration rules
MTS - Make-to-Stock
Make-to-Stock is the manufacturing choice when the customer expectation is for very short lead time (availability in stock at PoS is an “order qualifier”) and thus does not expect to configure upfront the characteristics of the product/service to buy.
In this environment
Products schedule are built ahead of receiving a customer order,
Production volumes are based on forecast demand
Orders are filled from existing stock, and, unless orders are unexpectedly large, they are filled quickly
Variety of product variants for each product line is low
Jobs in the MTS environment tend to be repetitive: workers repeat the same tasks with each batch produced.
In this kind of environment, dominated by high volumes, the productive flow can be organized in: Continuous manufacturing flow or Production lines for Discrete manufacturing flow
Performance metrics in this kind of environment are:
Control over costs is especially important in the MTS environment. This includes managing supplier performance closely to avoid interruptions in production, forecasting supplies and production carefully to minimize inventory costs, and investing carefully in the expensive technology needed to produce this level of volume.
Competitive forces are more likely to keep margins low. As volume increases, cost performance becomes important
How those characteristics influence the selection of the right CPQ?
As products are fully standardized and with minimal variants it is more correct talking of "order configuration" rather than "product configuration".
The key characteristic is that prices are driven by the market and requires frequent updates of list prices
Customer orders are generally for large volume and large number of items
In general, those items can be bought based on a Schedule Agreement signed upfront
The qualifying characteristics to be found into a CPQ for this scenario are:
Ability to create quote managing large volumes of line items
Frequent update of list prices
Possibility to create Schedule Agreement and then keep trace of shipping consuming the order
Ability to manage pricing and discount rules that may be more complex than the other environment
Ability to edit mass update to multi line item proposals
The winning characteristics to be found into a CPQ for this kind of environment should be searched in the performance to handle numerous and complex list prices and pricing rules and the ability to manage large volume quotes with many line-items.
A part those main requirements, such environment does not present high complexity for the sales and quotation process like the other environments presented above.
It is possible to evaluate generalist CPQ for this scenario, with particular attention to performance to manage quotations with many line items
Notes:
[1] The APICS dictionary, 15th edition
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