Introducing the Topic
We’ve been researching make-to-order (MTO) and engineer-to-order (ETO) approaches for over two decades and we’ve witnessed continued growth in product customization. We’ve also watched configuration approaches and technologies evolve. Two things have been consistent over time:
- Configured products are compelling for customers
- Configuring and making products to order is challenging for manufacturers
What else has changed? We recently surveyed over 200 companies that manufacture to-order products to find out.
Introducing the Expert
I recently had the opportunity to sit down with Rick Smith , Director of Engineer to Order Solutions at Siemens Digital Industries Software, to get his perspective on our survey and configuration and MTO (make-to-order) trends. I’ve worked with Rick on some of our research, including his participation as a contributing subject matter expert for our recent Making To-Order Product Configuration Profitable survey. I’m always excited to learn from his experience working with customers in the MTO and ETO (engineer-to-order) space.
Jim Brown
Hi Rick. Will you please introduce yourself and your company, and let us know your role with configurators and to-order products?
Rick Smith
I’m Rick Smith with Siemens Digital Industry Software. I’m a product manager for the Rulestream product line. Siemens has a very broad portfolio of engineering and manufacturing software, of which Rulestream is the solution for engineering automation. It works very closely with Teamcenter, our industry-leading PLM system. Rulestream interfaces directly through Teamcenter to a large number of the other solutions in the Siemens software portfolio, so it’s integrated to a complete set of design and CAE (Computer Aided Engineering, or simulation) tools.
Jim Brown
Rick, I always appreciate your enthusiasm as much as your expertise. What gets you jazzed about to-order manufacturing and configurators?
Rick Smith
The excitement goes back to the early 2000s when I discovered the profound impact an automation solution could have on the world of manufacturing complex products. I always suffered from the inefficiencies of the available tools and thought there had to be a better way to do it. In my early exposure to Rulestream (as a customer), I realized that it is a really different way of doing things, giving me the tools that I need to be more productive not only as an engineer but also across the whole business in terms of accuracy and efficiency.
Configuration Drivers
Jim Brown
Thanks Rick. I’m excited to talk about the research with you. The survey looked into why companies configure products. The results show a variety of reasons. The top two, differentiation and higher prices, are about the ability to attract business and profit from it. For them, it’s about revenue and profitability. But sometimes companies don’t have a choice. In fact, our studies often show that providing to-order products is a “must have” for their industry.
Rick, you’ve been working in the space for a long time. Why is making products to order so compelling?
Rick Smith
I think there are several reasons, and it depends on the company and the industry. For one industry, it may just be the nature of the beast. If you’re building a solar or a wind solution, you want to use every square inch or cubic inch of space to generate as much income as possible. That means that you want to put up as many solar panels or as many turbines of the right size to fit the space available. Or, if it’s a hydro dam, you want to get more kilowatt hours or KVA from the same amount of water. Can we get a more efficient turbine? Can we get more efficient distribution? All of those things require engineering to customize the solution to the unique requirements of the request. By choosing to be in this industry, you chose MTO.
Jim Brown
The next most common response is to sell standard products. In this case, selling customized products is a necessity for commercial rather than technical reasons. What creates this scenario?
Rick Smith
One way this happens is in industries that are commoditized or commoditizing. If customers are consolidating their spend and a manufacturer can offer customized products alongside their standard ones, they choose the company that can offer related products that are configurable, allowing that company to sell more standard products and become the supplier of choice.Making To-Order Product Configuration Profitable, Tech-ClarityMaking To-Order Product Configuration Profitable, Tech-Clarity
Or, they’re in a commodity business and they recognized that if they can offer a customized solution at the same cost and lead time as their competitors are offering standard solutions they can take over the market. We had just one such company do that with a commercial air handler, a very competitive business, and they became the number one supplier of that product in the world.
Growth / Trends in Configuration
Jim Brown
Configured products are compelling and companies don’t seem to be able to get enough of them. Our research from five years ago showed that the majority of companies were increasing the amount of configuration in their products, and it jumped again during our latest study with 94% saying it will grow over the next five years.
Why do you think customization continues to grow?
Rick Smith
It’s all the reasons that we just talked about that drive the desire to do it. Everybody wants a product that is tailored to their unique needs, right? But
I think more companies are moving towards it because their competitors are and they want to either lead or catch up. Just the HVAC example that we talked about, right? They killed their competitors because they offered a custom product.
I also think it’s because automation makes it more cost-effective. Engineering software can do more for to-order manufacturers than ever. It now takes them less effort to support customization across their business because the technology can accomplish more for them and is more integrated into other engineering and manufacturing applications.
Sales Best Practices
Jim Brown
One of the things we looked at in the survey was best practices to increase profits from to-order products across different aspects of their business, including engineering. I know you and I are both engineers, and we found best practices there, but let’s focus on sales. We analyzed what top performing companies do differently in the selling process.
One of the things that we saw was moving configuration closer to the customer, or “shifting left. About one-half of all respondents have taken steps to shift configuration left, such as from sales engineers to salespeople or from distributors to customer self-service. Almost all, a full 90% of responding companies, have, or would like to, shift configuration closer to the customer. Why do you think that the manufacturers are moving detailed configure order entry towards the customer?
Rick Smith
Making To-Order Configuration Profitabile, Tech-ClarityPart of it I believe is due to demographics of the people who are buying. I was a chalkboard and slate guy. There are people today that were born with technology in their hands that expect the ability to chat to their friends at any point in time. So their expectation is I want to do whatever I want to do when I want to do it. They want self-service.
I think part of it is to be easier to buy from. So, we always talk about the sales process. I want to talk about the buying process, which is the more important part. Customers are going to buy from whoever they can buy from the easiest, so long as it is a good solution at a competitive price. It doesn’t even have to be the lowest price necessarily, but they’re the easiest to buy from. The same is even more true for distributors that may carry different product lines. They don’t necessarily care which line they sell, so they are motivated to sell the one that is easiest to order.
Another proof point that the shift left is happening because is that the survey says companies need mobile device support. Ten years ago, you were not going to buy anything on your phone. Now, it’s required because people expect to be able to configure and order things from their mobile device.
Jim Brown
Great insights. Well, we know it’s valuable because Top Performers are 74% more likely to have significantly shifted configuration left than poorer performing companies. As I mentioned, we also identified best practices for engineering techniques, but we’ll have to save that for another interview.
Supporting Technologies
Jim Brown
There are a variety of technologies available to help companies reduce (or perhaps embrace) the complexity of configuration. Sales configurators, engineering configurators, and simpler CPQ solutions. Top Performers are more likely to use configurators in general. But what really stood out is that they’re also more likely to use advanced configuration functions like of drawing creation, CAE automation, 3D visualization, and engineering calculations.
Rick, this reminds me of the automation you spoke about earlier. In the survey report, we interviewed a customer who says they reduced engineering hours from CAD automation that works hand-in-hand with their PLM. The Top Performers also say it helps them grow revenue and profitability.
Why do you think these capabilities are correlated with improving operational and business performance of their to-order products?
Rick Smith
I think there’s two things. It allows them to create a better quality design and a better quality bid package. That’s a start. But the types of products that our customers sell are not simple products, right? There are calculations that need to take place. There are a lot of very good CPQ systems with good configurators built into them, but those are not really built for technically complex products. The industries targeted in the survey included heavy equipment, industrial machinery, agriculture, and energy equipment. Those products require more industrial strength, if you will, configuration technologies.
They need better tools to get the value they want. For example, the survey showed the leaders use substantially fewer engineers in the bid process. It’s because those companies use the more sophisticated tools that are capable of doing more of what an engineer does as part of the sales process. The market leaders have figured out how to get the engineers to invest their brains into the configurator so they can go off and build new, exciting things and they don’t need to be a part of creating the bid package.
Jim Brown
So not only are the Top Performers able to create better-configured order designs and design deliverables, but they are also doing it more efficiently, responding more quickly and freeing up engineering resources at the same time?
Rick Smith
Exactly!
Looking Forward to AI
Jim Brown
Let’s drill down on technology. Our research shows that companies are getting significant value from AI, and we’ve even seen that AI is providing benefits faster than other technologies. We haven’t studied the use of AI for configuration, although it seems like there could be significant value. I have to imagine you have looked into the value of AI for product configuration. Is there real value, or are we just in a period of hype?
Rick Smith
There is a ton of excitement. I think you’re right that it is a little bit early, and I think some of it is misunderstood. One of the areas where we can see direct applicability of AI is getting specifications right. A customer may provide a spec document and drawings. Then, a sales engineer opens it up with a yellow highlighter (or virtual yellow highlighter) and reads through those requirements and the drawings and creates takeoffs. That’s a perfect application for AI, and there are solutions available to help with that today. That directly replaces manual effort.
Another area that’s very interesting is being able to get more information out of your configuration knowledge. Configuration rules have typically been expressed in a form that a solver can use, whether it’s declarative, closed form, constraints, or whatever. You could use AI to interpret it and give you back that knowledge in a format that people can understand, validate, and reuse.
Jim Brown
That’s very interesting. Will AI replace traditional configuration techniques?
Rick Smith
I don’t think they’re going to replace the automation or configuration solutions. And here’s why. You need to train AI. But how many designs do most companies have that actually follow their design best practices? The designs may include changes to address a supply chain event or may be prior to a cost engineering event. Do they have enough designs to cover the full range of product variability in the way they design today? Automating outdated rules does you no good. And even if AI got you 80% of the way there, well-formed automation or well-formed configurators give you the right answer 100% of the time.
In the next several years, I do think AI can be used to help feed configurators the rules. That’s something that’s done by hand today and can be assisted by a co-pilot.
Advice
Jim Brown
The last question I would ask you is if you were working for a manufacturer and trying to figure out what you were going to do around configuration, what advice would you give yourself?
Rick Smith
I did not have an answer thought through on this one. I think there are three things I would say:
First is to understand your product space, your competitive landscape, your market, and the trends for the future. Don’t just try to solve today’s problem.
The second thing is be careful. You need to leverage the experts and ask them counter questions. We’ve seen examples where consultants have recommended an approach like shifting from ETO to MTO that was fundamentally unachievable. That company wasted a lot of time and money, and ended up losing significant market share. Work with people who understand configuration.
Finally, look at a platform. You want to have a platform that’s going to be around because you’re going to be investing in it. Look at companies that have proven track records, are continuing to invest in their solutions, and are investing in the integration of solutions. Point automation can be helpful, but optimizing for an entire business process is even more powerful. Configuration is not trying to automate one little thing, it’s trying to optimize an overall digital thread, a business process for to-order products.
Jim Brown
That makes sense. Configuration doesn’t only touch Engineering, it impacts across the enterprise and the supply chain.
Key Takeaways
Thank you Rick. That’s all we have time for. As we concluded in the report, we believe that the use of product configurators is a basic necessity for designing, selling, and delivering to-order products, but that companies who adopt proven best practice engineering, order, quote, and technical enabler gain significant advantages that translate directly to improved revenue and profitability.
There is more information available in the underlying survey report, including interviews with Schumacher Elevator Company and Ingersoll Rand. You can view a summary of the research on our site or download the full survey report courtesy of Siemens.
Thank You
Thank you for the conversation Rick, I always learn something new when we talk!
