The Worst Business Paradigm For Highly-Configurable Products
If you wanted to start a company that offered highly-configurable products, the worst business paradigm for highly-configurable products you could select would be engineer-to-order (ETO).
Under this business paradigm, there is a high level of engineering content and effort required for each order configuration. Sometimes there is compensation for this engineering effort; in non-governmental applications, there usually is no compensation.
For example, if the U.S. Air Force contracts for a new fighter plane, they may well pay for the engineering effort and a few prototypes to evaluate the efficacy of the design before the plane is put into a mass production environment. The prototypes may involve craft production techniques in the absence of hard tooling and other items that promote manufacturing efficiency.
Engineer-to-order is also found in commercial products. For example, for customized fire/rescue vehicles, the cost of engineering the vehicle is generally not recoverable from the customer as the customizations are considered a manufacturer’s “cost of doing business” by the customer.
Why? There are enough manufacturers willing to do what a customer wants at no additional charge just to win the business from the customer. This creates a “dog-eat-dog” environment where low margins result.
The following white paper illustrates some of the pain points within one industry producing highly configured products:
It is wonderful when the Wall Street Journal recognizes the achievements and progress in the fire/rescue industry. On July 25, 2005, Timothy W. Martin, WSJ Staff Reporter, wrote an article titled Fire Trucks Go High Tech and subtitled Spurred by 9/11 Spending, Rigs Cost Up to $1 Million; 29,000 Options, Even A Sink
The article reviews the complexities of a tiller ladder truck ordered by the North Hudson, New Jersey, fire department and other departments. Mr. Martin did a masterful job depicting how the mission of the fire departments has evolved from fire fighting to include rescue, hazmat and EMS and how, as a consequence, the configurability of trucks has grown exponentially. Yet, the processes for selling, engineering and producing these vehicles lag industry needs.
Those of us who have been involved in the process of ordering and producing fire/rescue vehicles understand that each order configuration represents a painful and arduous birthing process. It is difficult for departments to decide what features and options they are going to need on a vehicle that will have a useful life of 8-15 years or more. It is even more difficult for vehicle manufacturers in this intensely competitive industry to engineer and produce customized vehicles limited only by the imagination of the committees that specify them and the budgets of the municipalities and agencies that buy them.
The fire/rescue vehicle manufacturers have a “dirty little secret” not revealed in the WSJ article—these highly-configured vehicles all too often yield little if any profit. This is killing many manufacturers. The challenge these manufacturers face is reducing the extraordinarily high level of Engineering content per order configuration. The current challenge brings with it a good number of potential as well as costly problems:
- Late Customer deliveries—a lack of smooth order flow through the factory often caused by the discovery of missing parts at critical points during build process.
- Frequent margin disappointments due to underestimating costs that are not clearly understood when the order is accepted.
- Engineering effort incurred to support each order configuration:
- Is non-recoverable expense.
- Typically cannot be leveraged into future orders.
- Overwhelms Engineering’s ability to create new products and enhance existing products.
It would make a lot of sense for fire/rescue vehicle manufacturers to shift from the current “engineer-to-order” paradigm to a “mass customization” paradigm. Under Mass Customization, the product options are pre-engineered and modularized so the Customers and Dealers can recompose them into highly-customized order configurations specified through electronic selling tools seamlessly connected to the factory.
Mass Customization allows for 90% or more of the order configuration’s Engineering effort to be completed in advance of the order taking, ensures cost and margins are understood, and provides the Dealer with a significant range of options from which to configure a Customer’s order. The offerings can go far beyond what has become commonly known as limited option “program trucks.”
A business and industry that cannot make money is in a precarious state. Fire/rescue vehicle manufacturers cannot continue to try to be all things to all people if their financial health and viability is continually compromised. There is a better way. As this transformation can’t occur overnight, it is best to get started sooner rather than later and advisable to get outside assistance to drive this critical transformational initiative.
Think about that: a business and an industry that cannot make money is in a precarious state.
If you have this problem, it is likely you do not know how to solve it or you would have already. It is not as simple as buying configurator software I can assure you. The dimensions include people, process and technology. You can’t solve for any 2 of these dimensions and hope to achieve success.
Note: This article is derived from my book: Mass Customization: An Enterprise-Wide Business Strategy.
Thought for the week:
“The magic formula that successful businesses have discovered is to treat customers like guests and employees like people.” – Tom Peters