Supply chain management A strategic issue in engineer to order manufacturing

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The characteristics of Engineer to Order (ETO) companies are described in terms of their markets, products and the internal processes of their organisation.

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Int. J. Production Economics 65 (2000) 179 } 190 Supply chain management: A strategic issue in engineer to order manufacturing C. Hicks *, T. McGovern , C.F. Earl Department of Mechanical, Materials and Manufacturing Engineering, University of Newcastle, Stephenson Building, Newcastle upon Tyne, NE1 7RU, UK School of Management, University of Newcastle upon Tyne, Newcastle upon Tyne, UK Received 13 May 1997; accepted 1 February 1999 Abstract The characteristics of Engineer to Order (ETO) companies are described in terms of their markets, products and the internal processes of their organisation. These are set in the context of current trends in supply chain management. The business processes associated with the procurement and marketing functions and the interactions with other processes are analysed. These are compared for a number of di!erent types of ETO company. The variety of work in ETO projects, the customised, complex products and the underlying uncertainties of markets all indicate that procurement and marketing need to be integrated with other processes, particularly tendering and design. These characteristics put constraints on the application of established supply chain management methods. It is argued that a strategic view of supply chain management in which procurement makes a greater contribution in the tendering and early product development activities has the potential to improve performance. 2000 Elsevier Science B.V. All rights reserved. Keywords: Supply chain management; Engineer to order; Business processes; Strategy 1. Introduction extensive literature on the high-volume sector, par- ticularly automotive and electronics [1,2]. Companies in all sectors are examining ways to This paper examines how the special nature of reduce costs, shorten product development times the ETO business constrains the application of and manage risk. The transactions between com- supply chain methodologies. The characteristics of panies in supply chains are characterised by adding ETO companies and associated supply chain man- value up through the chain and incurring costs (and agement issues were derived from studies of ETO consequent payments) down the chain. Supply companies involved in the design, manufacture and chain management aims to reduce costs, risk and construction of capital equipment for the power, lead-times associated with these transactions, thus materials handling and o!shore industries. The re- releasing value. There is limited research into sup- search focused on modelling business processes, ply chain management in the low-volume Engineer planning and control, analysis of speci"cations and to Order (ETO) sector. This is in contrast to the supply chain management. A business process approach to describing ETO companies was adopted. This helps to identify the * Corresponding author. 0925-5273/00/$ - see front matter 2000 Elsevier Science B.V. All rights reserved. PII: S 0 9 2 5 - 5 2 7 3 ( 9 9 ) 0 0 0 2 6 - 2
180 C. Hicks et al. / Int. J. Production Economics 65 (2000) 179 } 190 nature of relationships between customers and sup- strategic importance. A}F are ETO companies that pliers. These are particularly complex in ETO busi- supply highly customised products to meet indi- nesses, which are involved in many di!erent types vidual customer requirements. Company G has of supplier relationships. A systems modelling ap- high value orders but these are typically for over 10 proach to representing this complexity is reported units. It has a standardised range of products that elsewhere [3]. The ways that internal organisation are con"gured to meet a broad range of national and structure constrain the role of supply chain and international electrical distribution require- management in ETO companies are considered. ments. They are supplied on a make to order basis. The paper does not investigate in any detail the Companies A}E produce products with complex consequent issues of supply chain relationships, but and deep product structures whilst companies rather identi"es the environment in which these F and G produce less complicated items with relationships are established and maintained. Pro- a shallower product structure. curement decisions in ETO companies are analysed A summary of the collaborating companies and from an operational and strategic perspective. their business processes is provided in Table 2. All of the companies have design and project manage- ment capabilities. These are considered to be core 2. Description of ETO companies competencies in all cases. Companies A}D also perform manufacturing, factory-based assembly, The research was conducted in collaboration construction and commissioning at customers' with seven companies in the power generation, sites. Company E produces similar products to high-integrity materials handling and o!shore sec- company D but is much smaller in terms of turn- tors. The main business activities of the companies over and numbers employed. It only has a design are the design, manufacture and construction of and project management capability as all other capital equipment. A summary of the character- activities are outsourced. Company F produces istics of the collaborating companies and their electronic control systems, which are designed to products is shown in Table 1. meet individual customer requirements and are as- Companies A, B, D and G are the largest in terms sembled from generic electronic components. The of turnover and number of employees. For all the company installs and commissions its equipment at companies except company F, each order is a large customers' sites. Company G has a strong design proportion of annual turnover and is therefore of capability, but in general, products are developed Table 1 Collaborating ETO companies and their products Company Turnover Employees Products Typical order Customisation Depth of (Cm) product structure A 200 800 Steam turbine-generators 50}300 High Deep B 200 3500 Oil platforms 20}25 High Deep C 75 400 Power station boilers 50 High Deep D 125 100 Mechanical handling 20 High Deep E 25 50 Mechanical handling 10 High Deep F 25 100 Electronic control systems 3 High Medium G 150 600 Switchgear 50}100 Low Medium Company also project manages power station contracts. This business has a high level of outsourcing as the company only manufactures turbine generators. Customisation: Low } mainly standard products, Medium } customised options, High } engineer to order. Depth of product structure: Shallow } 1 to 3 levels, Medium } 3 to 6 levels, Deep } '6 levels.
C. Hicks et al. / Int. J. Production Economics 65 (2000) 179 } 190 181 technologies ranging from steel pressing through Table 2 Processes in collaborating companies to electrical assembly and testing. These include jobbing, batch and assembly processes. Company Processes Manufacturing Vertical The level of vertical integration and outsourcing processes integration varies considerably within this group of companies. It can be seen that companies A, B, C and G are A DPMACC JBFA High B DPMACC JBA High highly vertically integrated with substantial manu- C DPMACC JBA High facturing capabilities. These companies manufac- D DPMACC JBA Medium ture most of their products in-house, but outsource E DP None Low standard components and systems. The level of F DPACC A Low outsourcing is greater for company B as it produces G DPMACC JBA High structural components but outsources all mechan- Processes: D } design, P } project management, M } manufac- ical systems. Company D, although having some turing, A } assembly, CC } construction and commissioning. manufacturing capability, is less vertically integ- Manufacturing processes: J } jobbing, B } batch, F } #ow, rated than companies A, B and C. It is, therefore, A } assembly. more dependent upon outsourced items. Com- panies E and F are not vertically integrated and are to meet the requirements of regional markets rather therefore more dependent upon their suppliers. than individual customers. The company has a wide Table 3 shows some of the characteristics of range of manufacturing and assembly processes and supply chain management in the collaborating installs and commissions its equipment on site. companies. It can be seen that all of the companies Company A has the widest range of manufactur- are highly dependent upon outsourcing. This is ing capability which includes jobbing, batch, #ow particularly so for company E which outsources all and assembly processes and a wide range of manu- of its physical activities and company F that only facturing technologies. Fabrication of complex performs assembly, construction and commission- structures is the main manufacturing activity for ing activities. Companies A}C and G have reduced companies B and C. This involves jobbing, batch their supplier base whereas companies D, E and and assembly processes. Company D has a signi"- F still have a large number of suppliers. Companies cant fabrication capability, but it also produces A and B have established strategic alliances with a wide range of mechanical components. It has their customers and suppliers. Company B, in par- a range of jobbing, batch and assembly processes. ticular, has derived substantial competitive advant- Company F does not manufacture components age from this approach. Only companies A and B and only performs assembly activities. Finally, have formal partnership agreements with their sup- company G has a wide range of manufacturing pliers, but these are not single sourcing agreements. Table 3 Supply chain management in collaborating companies Company Outsourcing Supplier base Strategic Partnership Single alliances agreements sourcing agreements A Extensive Reduced Yes Some No B Extensive Reduced Yes Yes No C Extensive Reduced No No No D Extensive Diverse No No No E All physical processes Diverse No No No F All manufacturing Diverse No No No G Extensive Reduced No No No
182 C. Hicks et al. / Int. J. Production Economics 65 (2000) 179 } 190 The ETO sector encompasses many types of com- marketing activity may include identifying new pany, designing and manufacturing a diverse range business opportunities that can be exploited using of products. Individual products are generally highly existing expertise and resources. Over the last dec- customised to meet individual customer require- ade, the nature and signi"cance of the marketing ments and are produced in low volume on an engin- function has changed in the collaborating com- eer, or make to order basis. The main products have panies. It is now strategic. The privatisation of the deep and complex product structures that give rise electricity supply industry has transformed the to many levels of assembly process. They contain competitive environment for companies A, C, a diversity of components, some of which are re- F and G. The decline in the oil price, the shift quired in very low volume, whereas others are re- towards smaller oil "elds, and the globalisation of quired in medium or large quantities. Certain the industry has had a similar e!ect on company B. components and systems are highly customised The second stage is the response to an invitation whilst others are standardised. Some components to tender for a particular contract. The tender in- such as the control systems are technologically ad- volves the preliminary development of the concep- vanced whereas other items such as structural steel- tual design and the de"nition of major components work are not. In general, high levels of customisation and systems. Contact with selected suppliers is lead to increased costs, higher risks and long lead- made at this stage to obtain information on costs times. It also makes outsourcing more di$cult as and lead-times. There are often a number of phases component and subsystems requirements are only of negotiation with suppliers that aim to match fully speci"ed after the design process has taken overall project cost and lead-time with anticipated place. Most of the companies have recognised these customer and market requirements. A technical di$culties and are trying to increase design standar- speci"cation, delivery terms, price and commercial disation based upon modular design principles. In terms are agreed at this stage. This represents a many cases, this approach has proved di$cult due major commitment. Success requires a detailed to diverse customer requirements. Many designers understanding of customer needs including tech- also have a strong desire to produce creative cus- nical features, price, delivery and quality require- tomised solutions. ments. This would imply the need for a strategy based upon customer intimacy [5]. Konijnendijk [6] reported that the tendering success rate is often 3. Business processes in ETO companies less than 30%. Research with our collaborating companies indicates that the strike rate is often For the purposes of describing the business pro- lower. cesses within ETO companies we decompose the The third stage takes place after a contract has complex processes of interaction with customers been awarded. Initial activities are non-physical [7] and suppliers into three stages. The "rst stage is including the development of an overall project marketing, which is a two-way process that devel- plan and detailed design. This is followed by pro- ops potential customers' awareness of the company curement, then the physical processes associated and its products. It provides an opportunity for the with component manufacturing, assembly, ETO company to identify market trends, technical construction and commissioning. The level of and non-technical customer requirements, as well involvement by the company itself in these physical as the customer's criteria for assessing competing activities varies from company to company and is o!ers. It is based upon relationship marketing [4]. dependent on the level of vertical integration. As in Decisions on whether an invitation to tender is other sectors, ETO companies are reducing the worth responding to are made at this stage. These degree of vertical integration as they increasingly are based upon an assessment of customer require- rely on outsourcing [8]. The interaction of pro- ments, commercial factors, the company's ability to cesses within these three stages will emerge as an compete and the likelihood of success. Where the important aspect of our analysis of supply chain markets for major products are in decline, the management.
C. Hicks et al. / Int. J. Production Economics 65 (2000) 179 } 190 183 ETO companies respond to their markets in features and a minimum diversity of spare parts, unique ways [6]. The product range is mostly or by the supplier's desire to minimise costs and based upon previous orders. Product innovation complexity. may be general, such as developing an underlying The ETO sector is characterised by a large technology, or it may be speci"c to meeting the design content per order, the types of products requirements of a particular customer or order. produced, the business processes and the nature of Medium- and long-term planning is usually based the markets. Before proceeding to discuss how upon aggregated information expressed in terms of these a!ect supply chain management in ETO com- value or labour content. Typically a yearly sales panies, di!erent approaches to vertical integration plan co-ordinates marketing and manufacturing within the sector are considered. Vertical integra- requirements. Decisions to outsource manufacture tion is particularly relevant as it is a variable feature are often taken at this level. Delivery dates in ten- in ETO organisations and a!ects the level and type ders are based on lead-time estimates. These are of outsourcing. usually produced without information on available capacity, as it is common for there to be several `#oatinga quotations awaiting responses from 4. Vertical integration potential customers. Detailed speci"cations that determine work content and duration are also The research undertaken has shown that ETO uncertain at this stage. It is, therefore, necessary to companies can be classi"ed according to the level of reconsider the lead-times and delivery dates at the vertical integration. They span a continuum from order acceptance stage and to con"rm arrange- in-house manufacture of all components and as- ments with the customer. It may also be necessary semblies at one extreme, to a pure design and to review outsourcing decisions at this stage. contract organisation at the other. Furthermore, A key competitive factor in ETO markets is two types of design and contract business can be delivery performance. Improving performance has identi"ed. In the "rst type, all items from suppliers two components: reducing lead-time and increasing are delivered to site and the ETO company carries the reliability of lead-time estimates. Lead-time re- out the construction and commissioning phase of duction has been achieved by shortening the dura- the work. In the second type, all physical activities tion of individual processes and by increasing the are undertaken by either suppliers or subcontrac- overlapping of previously sequential activities. Im- tors. Only marketing, design, procurement and provements in technology such as the application project management are performed internally. of large multifunction machine tools can reduce In considering the appropriate level of vertical process times and improve dimensional accuracy. integration, ETO companies seek an optimum This in turn reduces assembly times and their varia- response to a number of factors. These include: bility. Improvements in software support including reconciling customer delivery times with available computer aided manufacturing (CAM), computer capacity; reducing costs; the availability of capital aided production management (CAPM) systems, for investment in equipment; potential utilisation of computer aided design (CAD) enable faster plant; internal and external capabilities and #exibil- response, better planning and facilitate product ity. These factors vary from "rm to "rm giving rise innovation. Concurrent engineering methods pro- to di!ering levels of vertical integration. This varia- mote design for manufacturing and assembly as bility makes it di$cult to prescribe best practice for well as the overlapping of these activities. Unex- supply chain management in ETO companies. Our pected redesign and unnecessarily complex manu- observations on ETO companies suggest that there facture are avoided, thus giving more reliable lead- has been a trend towards vertical disintegration time estimates. Delivery performance can also be driven by "nancial pressures and the need for cost improved by streamlining products and processes reduction. Vertical disintegration can increase #ex- through modularity and standardisation. This may ibility by making alternative product con"gura- be driven by the customer seeking familiar product tions possible, but it can also reduce the scope of
184 C. Hicks et al. / Int. J. Production Economics 65 (2000) 179 } 190 Fig. 1. Vertically integrated ETO company. concurrent engineering and the #exibility to deal generator also includes several hundred thousand with design changes. core plate laminations that are manufactured using Fig. 1 illustrates the manufacturing processes a dedicated #ow line. performed by a vertically integrated ETO com- The model in Fig. 1 above shows that the busi- pany. The company produces, in low volumes, ness activities of ETO companies are more complex a main product that has a deep product structure. than suggested by Tables 1 and 2. A service and This typically consists of a number of major sub- spare parts business supplies items with shallow assemblies that have medium levels of product product structures. In some cases, additional busi- structure that are delivered to the customer's site ness activities have been developed to exploit ex- for "nal assembly. These subassemblies are produc- pertise or to increase the utilisation of resources. ed from a range of components that are manufac- The main product and spares businesses tend to be tured using jobbing, batch and #ow processes. An pro"t generators with the additional businesses example would be a large steam turbine generator. generating cash during times of low demand for the The high-pressure, intermediate and low-pressure major product. The spares and subcontract engin- turbines and the generator are delivered to site for eering activities involve the jobbing and batch "nal construction and commissioning. The turbine production of components with shallow product units consist of a turbine rotor and four turbine structure. For the main product, di!erent types of casings that are produced in low volume on a job- manufacturing processes need to be co-ordinated bing basis, together with several hundred blades with common assembly and construction activities. that are manufactured on a batch production basis. Fig. 1 describes the general structure of manufac- The generator has components, such as the rotor turing activities undertaken by the vertically integ- and the core frame, that are produced on a jobbing rated companies A, B, C, D and G. basis, with some components (for example, the con- The approach to the outsourcing of manufactur- ductor bars) that are required in intermediate ing activities varies from "rm to "rm. A common quantities. These are produced in batches. Each approach has been to concentrate on assembly
C. Hicks et al. / Int. J. Production Economics 65 (2000) 179 } 190 185 processes, as these are considered to result in high nical di$culties. This strategic change was essential levels of added value. Some companies have also if manufacturers were to implement total quality retained jobbing processes when manufacturing principles embodying just-in-time manufacturing techniques, minimum inventory, `right "rst timea technologies, or other capabilities, provide com- petitive advantage. In some cases, such as the pro- and Kaizen. The partnership, or obligational duction of large heavy components, in-house model, is characterised by: close operational and manufacturing capability is necessary due to a lack strategic linkages between buyer and supplier; the of potential suppliers. At the other extreme, some provision of technical and managed assistance to ETO companies have outsourced all manufactur- suppliers; and the establishment of preferred sup- ing, assembly, construction and commissioning ac- plier status or single sourcing agreements [18]. tivities as a mechanism for minimising overhead Some doubts have been expressed about how far costs. the obligational model has displaced the adver- In general, there has been an increase in out- sarial model. Indeed, research suggests that the sourcing by ETO companies. This makes supply adoption of these new practices tends to be piece- chain management strategically important, because meal, and not widespread in practice, but concen- of the reliance upon suppliers for technology, trated in speci"c sectors such as the automotive or electronics industries [19]. Even within `leading- design and manufacture. The next two sections edgea companies a number of constraints have compare the ways that supply chain management is addressed by companies in the high- and low- been identi"ed. For example, mistrust between volume sectors. buyers and suppliers has been found to be preva- lent [20]. There have been di$culties in establish- ing tiered systems of component supply [21] and 5. Supply chain management trends in high-volume problems in implementing JIT systems [22,23]. industries This suggests that the adoption and implementa- tion of new obligational practices are far from wide- In the high-volume industries, four key trends in spread. Indeed, in spite of the emphasis placed on supply chain management have been identi"ed in quality and delivery, price and cost are still the key the literature: outsourcing of non-core activities to determinants of contract awards [19,23]. suppliers [9,10]; focusing of operations [11,12]; Outsourcing, in particular, poses a number of a reduction in the supplier base as companies shift challenges and opportunities for companies. There from multiple to single sourcing [13,14]; and the are many strategic bene"ts of outsourcing to best- establishment of long-term collaborative relation- in-class suppliers: greater #exibility in the purchase ships with suppliers [1,15,16]. The outcome of of rapidly developing new technologies; a reduction these changes is that companies are establishing in design cycle times and higher quality. In addi- new forms of relationships with their suppliers. tion, risks relating to contractual obligations, or The traditional buyer}supplier model prevalent investments in research and development, may be in British industry in the 1970s was based upon transferred to the supplier [10]. The inherent adversarial, arms-length relations. Buyers tightly danger is that a technology critical to competitive de"ned production and process speci"cations. success may be outsourced, leading to the loss of `architectural knowledgea [24]. Components were obtained from multiple sources. Little information was disclosed to suppliers on As a company increases the scope of its supply, technologies, processes and projected production the proportion of the activities and resources that it targets [17]. Price competitiveness was the primary directly controls decreases. An alternative strategy criterion on which contracts were awarded. available to the company is to develop close collab- Adversarial relations proved counterproductive orative relationships with its suppliers to extend the to both parties, and by the beginning of the 1980s boundary of the "rm and exert indirect control a partnership model was being adopted to reduce over their resources. The growth in outsourcing costs, resolve scheduling problems and other tech- and the trend towards single sourcing has led
186 C. Hicks et al. / Int. J. Production Economics 65 (2000) 179 } 190 companies to strengthen their relationships with the Multi-sourced adversarial trading is widespread remaining suppliers. The strategic imperative for the in ETO companies. This is characterised by `win}losea transactions and mutual mistrust. Mul- buyer is how to capture and integrate the technology and knowledge of the supplier with the company's tiple sourcing constitutes a strategy for reducing own internal capabilities. There is evidence that in- purchasing uncertainty [28]. However, ETO com- volving suppliers at an early stage in design and panies recognise the importance of developing product development improves quality, increases a more collaborative approach to suppliers. This is productivity and reduces lead-time [25,26]. The sup- because bought-out items and services usually ac- pliers may also be an important source of innovation count for a large proportion of total contract value. in development of the product [27]. Attempts to shift towards collaborative relation- Researchers have also questioned the unequal ships are often frustrated by lack of trust due to distribution of power in the new collaborative rela- prolonged adversarial relationships. This situation tions between buyers and suppliers. In many cases, supports the view of Boyer [29] who identi"ed that co-operation was underpinned by strong buyer cultural constraints, the absence of trust and the control, enforced through vetting and monitoring prevalence of opportunism were barriers to change [17]. In e!ect, the more powerful buyers simply in buyer}supplier relationships. imposed terms and conditions on the weaker, de- Core activities can be interpreted in several ways pendent suppliers [23]. The main weaknesses of [9]. A core activity might be one that is: (a) tradi- previous research on high-volume manufacturing, tionally performed internally; (b) critical to busi- especially in the automotive industry, is that it has ness performance; (c) creating current or potential focused upon mass production of standardised competitive advantage; or (d) driving future products, in repetitive and routine assembly pro- growth, innovation or rejuvenation of the enter- cesses. These are normally controlled using JIT prise. In the ETO sector, the interpretation ranges systems that require close operational integration across these possibilities. This is one of the reasons between customers and suppliers. Research has why the level of vertical integration is varied. In the concentrated upon supply chains dominated by highly vertically integrated companies, core activ- a focal producer able to exert a signi"cant degree of ities of type (b) were prevalent. At the other ex- control over its much smaller suppliers [18]. This treme, in the design and contract organisations, situation does not hold for many of the core activities were of type (c). buyer}supplier relationships in ETO, low-volume The non-physical processes associated with ten- manufacture. dering, design and contract management are con- sidered to be core capabilities in ETO companies. This results in more attention being paid to prod- 6. Supply chain management in ETO companies uct capability and features than to design for manu- facture or assembly. This results in increased cost In ETO companies, the relationships with sup- and excessive variety of components and subsys- pliers were found to vary considerably due to: dif- tems. Changing design through standardisation, as fering levels of vertical integration; variations in well as understanding the product development volume for di!erent types of components; the process [30], o!ers the potential for managing degree of customisation of components; the level of design and reducing costs. concurrent engineering activity; the value of the Large batch and #ow line production systems item concerned; the proximity to the critical path; generally exhibit the characteristics of standardisa- and the power balance within the particular tion of products, repetitive manufacturing and as- buyer/supplier relationships. This variability sembly processes that are necessary to allow the full within, and across companies, means that caution application of JIT techniques. For example, the should be exercised in assessing the transferability implementation of Kanban, as a method of produc- of supply chain management practices from the tion scheduling, requires a steady-state #ow of high volume to the capital goods sector. materials. However, techniques such as Cellular
C. Hicks et al. / Int. J. Production Economics 65 (2000) 179 } 190 187 Manufacturing, Total Quality Management and involved in the speci"cation of items is an impor- inter-company JIT can be applied more widely. tant issue. Functional speci"cations (what it will Indeed ETO companies use cellular manufacturing do, rather than how it will do it) allow the suppliers methods for items with su$cient volume and stab- to develop their own designs, introduce innovation ility of demand. Implementations of Cellular and reduce costs [31]. Detailed technical speci"ca- Manufacturing and associated team working initi- tions reduce the design choices available to the atives involve considerable change in management supplier. This may constrain innovation and result and workforce attitudes. There are several exam- in unnecessary design and procurement activities, ples of the successful adoption of these approaches which increase cost and lead-time. There is a tend- in ETO companies. Statistical Quality Control is ency for companies with current, or previous often used in such situations but this is restricted to manufacturing capability, to produce speci"cations batch and #ow processes. It is possible that many of that are too detailed. Some important product fea- the features of inter-company JIT such as supplier tures that a!ect customer satisfaction may not be quality certi"cation and point of use delivery could explicitly speci"ed. For example, ease of mainten- be of use in ETO manufacturing. ance requires the designers to have knowledge of Bresnen [18] recognises that the majority of re- the through-life costs and operating conditions of search in supply chain management has focused on the product. Outsourcing, if not carefully managed, can lead to a `hollowing outa of the company particular industrial sectors, such as the auto- through loss of this `architectural knowledgea [24]. motive industry. The model of a large-scale (hence economically powerful) manufacturer supported by A challenge for ETO companies is to control design smaller (economically weaker) suppliers, or sub- and supply, by retaining the expertise to integrate contractors, that applies in the automotive industry subsystem performance speci"cations to meet is often inappropriate in the ETO capital goods stated and unstated customer requirements. sector. Power within supply chain relationships ETO companies make procurement decisions at may be biased toward the supplier, especially for di!erent stages of product development. First, cus- items required in low volumes, on an infrequent tomers may specify preferred suppliers, or present basis. The value of the order may not be signi"cant detailed speci"cations that can only be satis"ed by to the supplier. In some cases, the customer speci- a limited number of suppliers. Second, components "es the type and source of supply of important and subsystems may be speci"ed at the tendering sub-systems. For example, a customer purchasing stage and cannot be subsequently changed. These material handling equipment may specify the decisions sometimes take place by default. De- manufacturer and standard model for control sys- signers select items from suppliers' catalogues tems. This is to minimise both the diversity of spare based upon their functional characteristics, often parts and the requirement for operator training. without regard to procurement or commercial im- Another example of buyer dependence is in the plications. Third, engineering design may specify purchase of large, high-integrity forgings, or com- items during the detailed design process. This may plex castings used in power generation equipment. cause a delay in the availability of detailed speci- In these cases, it is because there are few potential "cations. Parts that have long lead-times should be suppliers. considered early in the design process. Special sup- plier relations are required to handle the remaining uncertainty in the exact speci"cation. Finally, when 7. Procurement in ETO companies standard parts are speci"ed, procurement may respond to requirements at any stage. On the Procurement obtains the speci"cations for com- other hand, there may be insu$cient constraints on ponents and sub-systems from the design function. speci"cations at the early stages of design. For The e!ectiveness of procurement in the ETO envi- example, if there is only limited re-use of engineer- ronment depends upon whether the speci"cations ing designs across orders unnecessary variety are correct and appropriate. The level of detail can be introduced. This variety increases the
188 C. Hicks et al. / Int. J. Production Economics 65 (2000) 179 } 190 `information and knowledge brokera, obtaining complexity of procurement and introduces uncer- tainty and risk [32]. In general, the use of standard knowledge about markets, competition and designs allows sourcing decisions to be made later innovation. [33]. ETO companies tend to have reactive procure- ment functions that are departmentalised and 8. Conclusions predominantly clerical in nature. Many sourcing decisions are predetermined by either customer This paper has examined the characteristics of speci"cations or early design decisions at the tender a group of ETO companies engaged in the supply stage. In many cases, companies use a lowest price of capital goods. These companies supply high ordering strategy. This fails to recognise the bene- value, customised products, with deep and complex "ts of creating partnerships, and the importance of product structure. Their business processes and having fewer, more reliable vendors. Consequently, company structure are described in terms of verti- the companies engage in continual vendor assess- cal integration, internal manufacturing processes ment and goods inwards inspection, which is waste- and outsourced supply. Company structures ful, time consuming and expensive. ranged from vertically integrated businesses, that To conclude, ETO companies are committing had signi"cant manufacturing capability, to design costs through contractual agreements based upon and contract organisations that outsourced all customer or internally generated speci"cations. physical activities. Burt and Doyle [34] identi"ed that 75}80% of There are three stages of interaction between total avoidable cost is controllable at the design ETO companies and their customers. The "rst is stage. Hence, early, proactive involvement of pro- marketing, which provides an opportunity for the curement in tendering and product design decisions ETO companies to identify market trends, tech- is essential to reduce costs. The variety and range of nical, and non-technical customer requirements, speci"cations and the high proportion of contract and customer criteria for assessing competing value that is outsourced by ETO companies strong- o!ers. The second stage is tendering that involves ly suggests that procurement should be regarded as the preliminary development of the conceptual de- strategic. In design and contract companies, sign and the de"nition of major components and bought-out components account for more than systems. A technical speci"cation, delivery sched- 80% of total costs. A strategic view not only assigns ule, price and commercial terms are agreed. procurement operational signi"cance but makes it 75}80% of costs is committed at this stage. The part of the corporate planning process [35,36]. third stage takes place after a contract has been Matthyssens and Van den Bulte [37] suggest awarded and includes non-physical processes, such that the procurement specialist needs to evolve into as design and planning, and physical processes as- a `supply strategista, whilst Spekman et al. [38] sociated with manufacturing, assembly and com- propose that the procurement manager should be- missioning [7]. Supply chain management in ETO come an `information manager and manager of companies involves the co-ordination of internal external manufacturinga. This manager would have processes across these three stages. responsibility throughout the supplier value chain ETO companies span a continuum from a fully to gather knowledge about products, processes and integrated company that manufactures all compo- competition that could a!ect the "rm's competitive nents and assemblies at one extreme, to a pure position. Vaughan [39] develops this argument fur- design and contract organisation at the other. The ther, suggesting that procurement should be viewed appropriate structure for a particular company is as a strategic process in which the company as dependent upon many factors including cost, capi- a whole participates. He argues that the procure- tal available for equipment, potential utilisation ment process in the capital goods industry should of plant, internal and external capabilities and #exi- be based on cross-functional, project-based teams. bility. These factors vary from "rm to "rm giving The procurement specialist would act as an rise to di!erent levels of vertical integration.
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