Industrial Equipment Manufacturing: Manufacturing Projects Versus Construction Projects – What’s the Difference?

Posted in ERP & CRM Software | Manufacturing & Distribution | Technology on January 19, 2016

IEM craneThere are fundamental differences between manufacturing and construction projects from an enterprise resource planning (ERP) system perspective.

In a manufacturing project, there is typically a bill of material (BOM) for the finished product. The product may be complex and the BOM will have many levels, but the end result will yield one BOM for the finished product when all design has been completed. This BOM was designed for a customer so that there is an Engineer-to-Order (ETO) manufacturing project in the ERP system.

Traditionally, the customer-specific equipment is built from the bottom up, cutting metal, creating small assemblies, until the final assembly. During this process, the inventory is built on lower levels of the BOM that is then consumed into assemblies on a higher level of the BOM. Certain things for multiple projects may be built as well for efficiency reasons. When the end product is finished, it is shipped, in one piece or disassembled, depending on size.

In summary, if your business is conducting ETO manufacturing, you need to have a manufacturing project in your ERP system that collects the cost and revenue, and under this project umbrella, have engineering, production and purchasing take place. In the ERP system, you should have material requirements planning (MRP)-generated purchase orders, production orders and possible transfer orders that should be linked to the project. In addition, another type of transaction is needed: project activities, preferably a Work Breakdown Structure (WBS), consisting of activities or WBS-elements.  Engineering, prototyping, site visits, countless activities take place in a project that do not translate into production or purchase orders and are critical for the project schedule.

This means that a manufacturing project requires a planning network, a network of activities. At a minimum, this is needed because numerous engineers may be working on the project and their activities have to be planned. It’s not feasible to use production orders for this because nothing physical is produced. For production, it’s not necessary to have an activity network, as long as there is one Finished Good BOM that can use MRP for the planning of production and purchasing. Of course, MRP has a specific challenge because that BOM is a growing BOM as the design nears completion.

 

If we contrast the above with construction projects, the first difference is that there typically is not a BOM of a finished product. There certainly are BOMs in all areas of construction, but there is no need for a Finished Good BOM that contains everything.  As a consequence, the finished product is not built to stock. This means, nothing needs to be shipped, nor or any sub-assemblies built to stock that are then issued to a higher level assembly. This certainly may occur within a construction project, but it is not the way a construction project is typically managed. The construction progresses as materials are consumed and as labor hours are spent on project activities. These activities do not result in any semi-finished inventory. If fact, no finished good inventory will ever be present.

When the construction project is completed, all of the activities are 100 percent completed, and nothing has to be shipped. Purchase orders are part of any project, but production orders are not a typical part of a construction project.

Let us look at this from another angle. Why aren’t there production orders in a typical construction project? The answer has to do with labor reporting.  A production order always makes a specific “thing” that ends up in inventory. The labor is reported against the making of this specific “thing.” In a construction project, this format doesn’t fit. As a project worker, there is work in the project on a specific section or part of the construction. But that specific area, section or part of the project, is not something created in inventory. The labor is project labor, and typically is reported to a specific project activity or a WBS-element.

To plan a construction project, there is a need to use a project activity network. MRP cannot be used for planning, because even after all design is completed, there is not a BOM in the system that contains everything. The activity network in the project plans everything from engineering to completion of the construction.

When we hear the word “construction”, we immediately think of a building or a subdivision (a collection of buildings), and those are certainly perfect examples. But it is also the building of a ship, or of a rocket, for example. As always, there is a gray area where an engineered piece of equipment that is shipped physically could be built with a construction approach.

The diagram below summarizes the differences between manufacturing and construction projects from an ERP system perspective:

Manufacturing Project

 

Construction Project

 

  • Typically ETO design, but standard products are often used on lower BOM levels
  • ETO for almost everything
  • Ultimately, when the is design completed, a finished product BOM will exist in the ERP system
  • Separate BOMs in areas of construction, no need for one top-level finished product BOM in the ERP system
  • Planning uses a combination of project activity network and MRP
  • Planning only done through project activity network, no MRP
  • Production orders used for manufacturing and assembly activities
  • No production orders are used
  • Semi-finished products created on intermediate BOM levels, often shared inventory between projects
  • No semi-finished products in inventory, no sharing of inventory between projects
  • Project results in one or more actual shipments
  • Project does not result in an actual shipment
  • Billing partly coinciding with actual shipments
  • Billing is 100 percent down payment and progress billing
  • Repeat projects building similar product is normal
  • Repeat projects constructing a similar product is unlikely

 

 

 

Evert Bos

Microsoft Dynamics Solution Architect

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Disclaimer: This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. 


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Disclaimer: This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.