Engineer-to-Order vs. Construction Projects

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Engineer-to-order (ETO) projects and construction projects appear to have quite a few similarities, but they actually have very different needs, especially when it comes to ERP.  In this post, we’re going to analyze to understand the difference between ETO concepts and construction concepts to determine if you are one, the other, or both.

Inventory

In typical construction, there is rarely inventory that’s held. There are some situations where you see that, but it’s more the exception than the rule. The materials and labor are for the job. Whereas in engineer-to-order, there almost is always inventory of some kind. Now, not everything used in ETO projects may be inventory. There may be things that were bought specifically for this unique ETO project, but there are usually warehousing and inventory concepts and engineer orders that you don’t see in construction.

In addition, construction typically sends stuff directly to the job site, whereas in ETO, the stuff is usually received in a central warehouse, such as the fixed manufacturing facility.

Where the inventory line between engineer-to-order and construction can get confusing is in scenarios where companies do what used to be only in-field construction types of products. These companies manufacture them in factories and then deliver them to the job site. So they’re building things like bathrooms or walls in a factory. They’re using manufacturing disciplines, but they’re delivering to the job site, and that’s where the lines get a little blurred.

Planning for Materials vs. Keeping Materials in Stock

For example, a construction job site may order rebar that needs to be delivered to the site, but it doesn’t mean that the company monitors the use and scrap like a manufacturing company would with inventory. Construction companies don’t receive these materials in a warehouse and hold them in inventory. Inventory is an asset that a company consumes on a product they are manufacturing. Construction jobs do not have that.

Instead, materials are planned for and scheduled out. You know how much you need already, because you’ve already done the takeoffs from the plans. You order it and time it to get to the job site when you need to use it. It’s never in inventory and never an asset. It’s a cost on the job, a completely different animal.

That’s where the lines get a little blurred, because if a company produces the same type of product over and over again, such as modular bathrooms or walls, that company will have a standard on everything it produces. So for those scenarios, construction companies can plan and manage inventory levels. In most cases, it’s far more simple inventory management. It’s probably a min-max type of thing, but the company is still looking to try to project out sales.

Consolidating to a Single Platform

ETO and construction companies often have two different software solutions. Some companies will use a manufacturing system as a standalone to handle the discrete part of the process and then integrate it with an ERP system that handles projects. Some may have a third system added to the mix.

The more advanced, more complete ERP packages have figured out ways to simplify this so your company can go from multi- to single-platform. The better ERP packages, such as Business Central or FSCM, support integration for additional solutions that are a fit for construction or ETO.

Having a great technology partner is crucial for this implementation. For example, Business Central, out of the box, doesn’t have this project-based manufacturing concept. To help out with this, we built a bridge for project-based manufacturing for companies that only need Business Central (BC) instead of Finance and Supply Chain Management (FSCM). We’ve also incorporated some other functionalities that are also not out of the box but typically seen with project-based manufacturing. These functionalities include quality control concepts around engineering, change management, as well as other features mid-market ETO companies need.

Labor

Typically, manufacturing companies’ labor all comes from one physical spot. This means, in addition to being able to manage labor and the manufacturing processes in one facility, the companies are not moving around the country where different states can have different labor rules.

It gets rather complex rather quickly for companies that are in multiple locations and multiple regions, such as construction companies. In construction, the company needs to capture all of the actual labor costs and on-the-job activities upfront, since labor is a large component of the job cost. Labor costs can make the difference for a project to be profitable or not.

In addition, there are also regulatory issues and union issues associated with labor. Some parts of the country, some cities, counties, etc., have prevailing wage rules. Certain types of skills, such as a journeyman electrician, have to be paid at a certain level or higher according to the law of that region. As a result, construction companies have to keep track of all of the actuals on the job at all the different skill levels for all the different activities.

ETO manufacturing, on the other hand, does not typically have that level of complexity.

Field Service

Another huge difference between construction and ETO projects is the service aspect. Servicing does come up with construction projects, but it’s not nearly as prevalent as it is with ETO. A lot of ETO manufacturers sell equipment with a service contract that includes maintenance and warranty obligations. D365 has service modules in both Business Central and FSCM, but there’s also D365 Field Service, which opens up even more functionality for servicing products.

Both Need a Well-Versed Technology Partner

Both industries need a technology partner that understands construction concepts, manufacturing concepts, and ETO concepts. The partner will help your company put together a “best of breed” solution that is the best for your company’s individual needs. Are you doing multi-site or multi-country projects that require you to think about vendors in different regions? What is your budget for implementing a single-platform solution? What are your expectations from software?

Your technology partner should be able to take these answers along with their industry expertise, and determine and tailor the best solution for your company. Maybe Business Central is exactly what your business needs, or maybe your business’ complexity and depth requires FSCM. We, at Sikich, are here to help your construction or ETO manufacturing company implement the optimal solution that fits your needs. We have expertise and experience in both industries as well as the Microsoft Dynamics software family.

If you’re ready to talk about which solution is right for you, or just have a few questions, please contact us at any time.

This publication contains general information only and Sikich is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or any other professional advice or services. This publication is not a substitute for such professional advice or services, nor should you use it as a basis for any decision, action or omission that may affect you or your business. Before making any decision, taking any action or omitting an action that may affect you or your business, you should consult a qualified professional advisor. You acknowledge that Sikich shall not be responsible for any loss sustained by you or any person who relies on this publication.

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